PNB Stocks May Sizzle In Your Portfolio In Medium To Long Term

Consolidation and merger are the two new buzz words when it comes the public sector banking these days. While the PSBs are struggling with rising stressed asset issue, the central government is working towards consolidation and merger of the PSBs. RBI also has been working towards coming up with a better, cleaner, smarter banking system in India, especially when it comes to PSBs. Punjab National Bank, a PSB is also in focus on the wake of much happening in this space and we have zeroed on in this bank for this fortnight’s stock analysis.

Understanding the business

PNB is a public sector bank which provides various banking services, such as digital banking, personal banking, social banking, micro, small and medium enterprises (MSME) banking, agricultural banking, corporate banking, international banking or non-resident Indian (NRI) and financial services. The bank operates through four segments viz. treasury, corporate or wholesale banking, retail banking and other such banking operations.

These days PNB is moving towards digitalisation and number of new age digital initiatives have been introduced to provide greater ease and improved delivery of products and services to its customers. The bank’s concerted efforts are on to increase usage of Alternate Delivery Channels which accounts for around 58 per cent of transactions.

Hope for Public Sector Banks Merger Plan

The government is considering a mega merger of 26 public sector banks (PSBs), which will create just six big lenders. The proposal envisages major banks like State Bank of India, Punjab National Bank, Canara Bank, Union Bank, Bank of Baroda and Bank of India leading the merger plan. The probable banks which may merge with PNB as Oriental Bank of Commerce, Allahabad Bank, Corporation Bank and Indian Bank.  

As a part of the proposal, Syndicate Bank, IOB and UCO Bank will be merged with Canara bank. Meanwhile, Central Bank and Dena Bank will be merged with Union Bank. Other banks like Andhra Bank, Bank of Maharashtra, Vijaya Bank will be merged with Bank of India.

PNB Housing IPO

PNB Home Finance has mandated three investment banks - Morgan Stanley, JP Morgan and Bank of America Merrill Lynch - to prepare for a USD 30 crore (Rs 2038.7 crore) initial public offering (IPO) during FY17

PNB owns 51 per cent in PNB Home Finance. The remaining 49 per cent is owned by Caryle, which acquired stakes in earlier 2015. The listing of PNB Home Finance could be one of the biggest IPOs to hit Indian bourses after InterGlobe Aviation (IndiGo) raised around USD 500 million in December 2015.

On financial front, PNB Housing Finance posted a 66 per cent rise in net profit at Rs 326 crore in FY16 against net profit of Rs 196 crore in FY15.  The home finance company has a net worth of Rs 2145 crore. Its assets under management have increased 59 per cent to Rs 27555 crore in FY16 on yearly basis. PNB Housing has a healthy loan book with gross non-performing assets standing at only 0.22 per cent as of FY16, with marginal growth of 0.2 per cent on yearly basis.

Network expansion

PNB expanded its branch network to 6759 and ATM network to 9463 as of FY16. The geographical distribution of branches as:


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Financials

PNB’s total interest earned increased by 6.29 per cent CAGR during last five financial years. The bank’s operating profit before provisions and contingencies declined by CAGR of 1.44 per cent. Its provisions and contingencies expense boost by 38.13 per cent CAGR from last five fiscal years.

On yearly front, PNB’s top line increased by 4.3 per cent to Rs 50804 crore in FY16 as compared to previous financial year. The bank’s operating profit before provisions and contingencies declined by 6.63 per cent to Rs 6123 crore in FY16 on yearly basis. Its provisions and contingencies expense rose by more than two times to Rs 18367 crore in FY16 as compared to previous fiscal year. PNB posted net loss of Rs 3690 crore in FY16 against net profit of Rs 3400 crore in FY15.

Considering latest quarter front, PNB’s total interest earned decreased by 11.42 per cent to Rs 10824 crore in Q4FY16 as compared to previous quarter. Its operating profit before provisions and contingencies dropped by 60.8 per cent to Rs 776 crore in Q4FY16 on quarterly basis. PNB posted net loss of Rs 5367 crore in Q4FY16 against net profit of Rs 51 crore in Q3FY16.

Recovery from written-off accounts reliefs other income

PNB’s income from recovery in written off accounts boosted more than double to Rs 2297 crore in FY16 as compared to previous financial year. Therefore, the bank’s other income increased by 16.7 per cent to Rs 6877 crore in FY16 on yearly basis.

Segmental business

On activity segmental front, PNB earned 45.1 per cent from corporate/ wholesale banking segment, 27.12 per cent from retail banking, 26.22 per cent from treasury operations segment and remaining 1.56 per cent from other banking operations segment during FY16.

On geographical segment front, PNB earned 96.58 per cent from Domestic region amounting to Rs 55805 crore and remaining 3.48 per cent from International region amounting to Rs 1976 crore in FY16.

War against NPA

On asset quality front, PNB’s bad loans have increased in Q4FY16. The bank’s gross non-performing assets stood at 12.9 per cent amounting to Rs 55818 crore as of Q4FY16 against 8.47 per cent to Rs 34338 crore as of Q3FY16. Its net non-performing assets stood at 8.61 per cent amounting to Rs 35423 crore as of Q4FY16 while 5.86 per cent to Rs 22983 crore as of Q3FY16.       

To come out from bad loans trap, PNB opened a war room in FY16. The bank created ‘war room’ at HO – real time monitoring of NPA recovery / reduction across pan-India. It has set a minimum target of recovering Rs 50 lakh per day per circle. PNB’s cash recovery and recovery in written off accounts has increased due to recently adopted new measures. There is better control on slippages due of regular follow-up even in Special Mention Accounts (SMA) ‘0’ accounts. The bank’s intensification of e-auction drive or exploring possibilities in each stressed account is yielding result. It strengthened sale of Asset Reconstruction Companies (ARCs) especially in those accounts in which all other banks have already sold their exposures.

We compared PNB’s net interest margin (NIM) with other peer set based on market cap and we see that the bank enjoys second highest NIM’s in the industry. The domestic NIM stood at 2.95 per cent in FY16 against 3.55 per cent in FY15. Its global NIM remained at 2.6 per cent in FY16 while 3.15 per cent in FY15.

On July 1, PNB announces marginal cost of funds based lending rate (MCLR) on loans for 6M- 9.35 per cent, 1Y- 9.4 per cent, 3Y- 9.55 per cent and 5Y- 9.7 per cent.

On valuation front, PNB’s book value stood at Rs 198.41. The bank is trading at PB multiple of 0.53x times which is quite attractive as compared to State Bank of India (0.94x times), Bank of Baroda (0.91x times).

Conclusion

Banking sector is witnessing a prolonged stressed assets issue. Because of bad loans banking sector’s growth has been sheared. There are a large number of public sector banks majorly affected by bad loans. Meanwhile, PNB has likely an advantage among peer group due to the bank’s home finance company’s IPO on schedule, the ‘war room’ concept for real time resolution, recovery and upgradation of NPAs. The consolidation of PSBs will also benefit PNB.

PNB has reoriented its business model in alignment with economic scenario towards small ticket business. The bank is driving fresh growth in business through its vast network of branches spread Pan India riding on the digital wave. It has framed strategies for all-round development and strength under ‘PNB Indradhanush’. This is multidimensional approach for business transformation focusing at people development, digital banking, improved customer service, quality credit, improved CASA and profit maximisation. Therefore, we recommend our readers to BUY this stock.