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Investors with a two/three-year investment horizon can buy the stock of Punjab National Bank. At the current market price of Rs 1,180, the stock trades at 1.5 times estimated FY12 adjusted book value and 6.8 times the estimated FY12 earnings. This is at a premium to most PSBs. The premium appears justified given the bank's strong net interest margins (NIM), return ratios (22 per cent return on net worth), high operating efficiency and higher than industry credit growth. However, given the market volatility, investors can consider buying the stock in small lots linked to market declines. As of December 2010, PNB witnessed credit growth of 29 per cent over a year ago, enabling a steady improvement in its NIM. This was 4 percentage points higher than the industry's growth rate. Historically, the bank has outpaced industry growth and can be expected to do better even if credit growth for the banking universe moderates.
PNB has underperformed the market over the last few months on concerns of asset quality slippages, rising pension costs eating into profits and expectation of squeeze in margins due to rising interest rate cycle.
The concerns though, appear overdone. The asset slippages during recent quarters have been in large accounts and restructured assets (such as realty), which may recover as their respective business cycles revive. Despite provisions for NPAs and pension costs, the net profit growth for the nine month ended December 2010 was a good 16.7 per cent.
PNB is poised to survive the rising interest rate cycle better than others due to high proportion of low-cost deposits (39 per cent). The rise in deposit rates only affect incremental deposits and the ones getting matured in the near future. On the other hand, the hikes in base rate and PLR by 1.5 and 2 percentage points would improve yields of close to 70 per cent of the present advances book, resulting in minimal margin shrinkage. NIM stood at 3.99 per cent for the nine months ended December 2010.
Capital adequacy ratio, too, is at a comfortable 13.3 per cent. Unlike most other PSBs, its equity dilution, therefore, remains insignificant.
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