The Hindu Business Line : Punjab National Bank: Buy

An investment may be considered in the stock of Punjab National Bank (PNB) at Rs 507. Strong fundamentals, ability to protect margins, well-capitalised balance sheet and attractive valuations make it a preferred pick among larger public sector banks (PSBs).

PNB enjoys the highest net interest margins of over four per cent among PSBs as it has a higher proportion of low-cost deposits at 49 per cent when compared to about 40 per cent for its peers. Further, unlike many other banks, PNB has adopted a selective approach in raising bulk deposits and this has worked to its advantage.

For the first half of FY 07, the bank's cost of funds has dipped marginally on a year-on-year basis. While the recent hike in CRR may have a marginal impact on its margins, we believe the re-pricing of credit is likely to improve credit spreads, thereby protecting the margins. Also, its strong focus on rural areas and recent initiatives aimed at financial inclusion should help it in attaining the target of 51 per cent for low-cost deposits by FY 08.

Business outlook for the bank appears healthy. Advances are likely to grow in the range of 20-22 per cent over the next 2-3 years. The moderate growth is unlikely to put pressure on its balance sheet. Excess investments in SLR along with adequate capital are likely to offer sufficient room for funding growth over the medium term. The asset book also offers a great deal of comfort with proportion of bad loans at 0.2 per cent. Provision coverage, which is high at 95 per cent, is likely to keep provisioning charges low over the next few quarters.

Fee income is also picking up and is expected to show healthy double-digit growth. PNB has also invested in technology platforms that are likely to help lower its operating costs. The stock is available at a price-to-book multiple of 1.5 times. As the bank is likely to generate and sustain a return on equity of 18-19 per cent, it is likely to sport a better multiple.

However, an element of risk stems from higher duration of bond book (slightly above three years). Should the bond yields rise sharply, the treasury book is likely to be exposed to market risks.

Radhika Kamath

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