Punjab & Sind valuation play

The ongoing initial public offer (IPO) of Punjab & Sind Bank seems decently priced and investors with medium to long term perspective can subscribe to the issue because of relatively cheaper valuations. However one shouldn’t expect a huge upside in the near term as the bank faces headwinds in maintaining its margins.

The midsize regional PSU bank, which has a strong presence in north and central India, has seen strong business growth over the last five years, with total advances and deposits seeing compounded annual growth rate (CAGR) of 36.24% and 28.24%, respectively.

The bank has been able to grow its loan book at a CAGR of 40% in the last two years, led by higher lending to corporates, who account for almost 56.6% of its total loan book as on September 30.

The retail segment contributes 15.3% to the overall book. Housing loans and personal loans account for 71% and 21%, respectively of the retail loan book.

However, on the deposits side, the bank is highly reliant on high-cost term deposits at 74.86% of the overall deposits and has very low proportion of low-cost current and savings account (CASA) deposits, at around 25.14% as of September 30.

The bank’s eagerness to attain higher business growth has seen its net interest margin (NIM) fall from 3.54% in FY08 to 2.67% in FY10 due to higher cost of deposits and lower interest earned on corporate loans. But, NIMs improved in the first half of this fiscal to 3% and the bank hopes to maintain the same by repricing the loans and getting more of CASA deposits.

The bank, which had just 17 of its 926 branches under core banking system (CBS) as of October 30, does not offer modern-day facilities like Internet banking and telephone banking currently. However, it aims to open more branches in the rural areas and loop in close to 500 branches under CBS by November 2012 so as to attract more low-cost deposits and grow its retail banking pie.

But implementation would take time and the bank is likely to face margin pressure in a rising interest rate environment as the majority of its term loans (close to 80%) are maturing within one year and it may not be able to increase its lending rates in line with the deposit rates.

As on September 30, its gross non-performing assets (NPAs) and net NPAs stood at 0.92% and 0.44%, respectively, while capital adequacy ratio was at 13.04% (in line with Basel II norms). Similarly its return on assets and return on equity for the last three years has been above 1% and 29%, respectively.

However, the bank’s asset quality and return ratios remain healthy at current levels, making its valuation cheaper than those of other midsize PSU banks.

At the upper end of the price band of `113-120, the bank, whose earnings have grown at a CAGR of 15% during FY06-FY10, would be trading at 4.4 times its FY10 earnings per share of Rs27.4. Also, going by its book value of Rs119.20 as on September 30, the stock is available at a price-to-book value of 1.

These valuations are lower than its state-owned peers’, and hence retail investors, who are getting a 5% discount on the issue price, can consider subscribing to the IPO.