Punjab National Bank - catching up fast with private sector banks!
April 17, 2009 Punjab National Bank is the second largest PSU bank, but is fast catching up with its private sector peers. Its 5 yr performance is commendable. The consistent focus on reducing NPA levels has paid off. Net Interest Margins have been stable around the 3.5 percent mark. Profitability metrics like Return on Assets and Return on Equity are on par with private sector peers. The only negatives could be that Net Interest Growth Income has slowed considerably (just 7% in FY08) and Provisioning Coverage needs to improve substantially. 
Data, Analysis contributed by Ayush Mittal Want to collaborate with me and contribute towards India Stock Analysis? Strong Capital BaseA strong capital base is the number one issue to consider before investing in a lenderPunjab National Bank's Capital Adequacy ratio is at 13.46 percent, much above the mandatory 9 percent requirement stipulated by RBI. Gross and Net NPAs (Non-Performing Assets) have been brought down sequentially, year on year, to comfortable levels in FY08. FY08 Gross and Net NPAs stand at 2.73% and 0.62% respectively. However, Provision Coverage needs significant improvements before it is anywhere near the standards maintained by leading private sector banks. Return on Equity (RoE) and Return on Assets (RoA)These metrics are the defacto standards for gauging bank profitability.Punjab National Bank's profitability record is commendable. Net Margins have been stable around the 12-13 percent mark. Return on Assets are good at around the 1.2 percent mark, probably the best record after HDFC Bank. Return on Equity is at ~19 percent, again comparable to the best in the Industry. And this has been achieved without very high Financial Leverage (~15x), which is commendable. Efficiency RatioThe efficiency ratio, measures non-interest expense, or operating costs, as a percentage of income. Basically it tells you how efficiently the bank is managed. Many good banks have efficiency ratios under 55% (lower the better)Cost Efficiency ratio has seen significant improvements on a consistent basis in the last 5 years to just over 33 percent in FY08. This beats its private sector peers HDFC Bank, ICICI Bank, and even the smaller, nimbler Axis Bank handsomely and rivals the much smaller Yes Bank. Net Interest Margins (NIM)Another simple measure to watch is net interest margin, which looks at net interest income as a percentage of average earning assets. Track margins over time to get a feel for the trend.PNB's Net Interest margins have been generally stable in the 3.5 to 4 percent range. FY08 Net Interest Margin stands at 3.58 percent which is again one of the best records among all banks, next only to HDFC Bank. Strong RevenuesHistorically many of the best-performing bank investments have been those that have proven capable of above-average revenue growthPunjab National Bank's FY08 growth has been good. Interest Income and Total Income growth stand at ~26 percent. The Balance sheet has also grown strongly with Advances growing at ~24% and Deposits registering a growth of ~20 percent. Price to BookBecause a bank’s balance sheets consist mostly of financial assets with varying degrees of liquidity, book value is a good proxy for the value of a banking stock. Also many of the assets included in their book value are marked-to-market –in other words they are revalued every quarter to reflect shifts in the marketplace, which means that book value is reasonably current. So the base value for a bank should be the book value. Any premium over that, investors are paying for future growth and excess earnings. Typically big reputed banks trade at 2x to 4x book value.
Data, Analysis contributed by Ayush Mittal Want to collaborate with me and contribute towards India Stock Analysis? Punjab National Bank is currently (Apr 17, 2009) trading at 1.2 Consolidated Book Vaue. On a TTM basis, it is again available at ~5.6 PE, which seem to suggest the stock isn't expensive. While Dividend yield is ~2.6%, there is no gainsaying whether this will be sustainable as the historical dividend payout record has seen a broad range from 8 to 20 percent! Overall verdictWorthy of further investigation. Need to see its performance in comparison with leading private and PSU banks. If you are interested in PSU Bank stocks in the Indian stock market, its time to get to get to quick-check stock analysis step 2: PSU Bank Peer Comparisons
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