Punjab National Bank Equity Research

Date of Research – 20 January 2016

Price – Rs. 87.50

About the Company

Punjab National Bank (“PNB” or the “Bank”) was set up in 1895 and is a Governement of India undertaking and provides banking and other financial services primarily to retail and corporate clients in India. PNB is the third largest bank in India in terms of asset size and is currently the second largest state-owned commercial bank in India.

For FY 2017, PNB’s net interest margins stood at 2.38% (2.60 % for FY 2016). Total deposits with the bank stood at Rs. 6,21,704 Cr. growing by 12.4 % over the previous year. For the same period, net NPA’s stood at 7.81% (8.61% for FY 2016). Share of CASA to domestic deposits stood at 45.97 %.

As of March 31, 2017, PNB’s customer base was over 9.5 Cr. and its distribution network was at 6,937 branches and 10,681 ATMs. Bank Bank has overseas presence in 9 countries i.e. Hong Kong, Dubai, UK, Bhutan, Kazakhstan, Australia, China, Nepal and Bangladesh.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Interest earned43,078.1144,958.1048,709.8250,803.87 48,058.08
Interest expended27,802.4328,220.2731,343.0534,330.59 32,722.31
Net Interest Income15,275.6816,737.8317,366.7716,473.28 15,335.77
Other income4,302.034,710.346,174.606,976.60 9,167.58
Operating expenses8,337.309,581.4910,808.9910,349.88 9,523.55
Operating Profit11,240.4111,866.6812,732.3813,100.00 14,979.80
Provisions (other than provisions for tax) and contingencies4,452.956,897.228,320.1218,366.83 13,439.71
PBT6,787.464,969.464,412.26(5,266.83) 1,540.09
Tax1,860.221,434.841,070.84(1,603.56) 638.96
PAT (before Minority Interest and share of Associates)4,927.243,534.623,341.42(3,663.27) 901.13
Profit/ (loss) attributable to Minority Interest65.3956.83125.84179.69 51.98
Share of profit / (loss) of Associates(92.36)(139.24)(184.02)(153.19) (338.09)
Consolidated Profit / (Loss) for the year4,954.213,617.033,399.60(3,689.77) 1,187.24

Profitability Analysis

ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Net Profit Margin Ratio10.407.126.09(6.34) 1.57
Cost to Net Income Ratio42.5944.6745.9144.14 38.87
Other Income to Net Income Ratio21.9721.9626.2329.75 37.41

Net profit margin is arrived at by dividing profit after tax by the total income generated (i.e. interest earned plus other income) and shows what is left for the shareholders as a percentage of total income.

Cost to net income ratio is particularly important in valuing banks. It is derived by dividing operating expenses by the net income generated (i.e. net interest income plus the other income). The ratio highlights the efficiency with which the bank is being run – the lower it is, the more profitable the bank will be. If this ratio rises from one period to the next, it means that costs are rising at a higher rate than income. Together these ratios help in understanding the cost and profit structure of the bank and analysing business inefficiencies.

Other income largely constitutes of fee income such as commission and brokerage fees and client based merchant foreign exchange trade, service charges from account maintenance, transaction banking (including cash management services), syndication and placement fees, processing fees from loans and commission on non-funded products (such as letters of credit and bank guarantees) etc. Banks in developed countries derive nearly 50% of their income from these non-funded sources. A high other income to net income ratio is good for the bottom line (i.e. net profit) as income from this stream is derived without significant mobilisation of deposits and hence the cost associated with this income is relatively lower compared to interest income.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016 
Share Capital339.18353.47362.07370.91392.72 
Reserves & Surplus28,864.6634,115.5637,731.1541,668.5341,411.53 
Net worth (shareholders funds)28,864.6634,469.0338,093.2242,039.4441,804.25 
Minority Interest331.42366.28423.11548.95728.65 
Other liabilities and provisions13,856.4915,651.6516,067.3118,972.5918,203.68 
Total Liabilities4,70,445.394,96,577.105,74,820.486,36,011.177,12,792.96 


Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016 
Fixed Assets3,217.143,422.363,490.443,655.775,308.12 
Cash and balance with RBI18,507.6417,929.5122,406.1424,435.7826,492.19 
Balances with banks and money at call and short notice11,612.2510,203.5224,459.8533,823.4450,557.19 
Other Assets10,015.5010,069.279,166.1412,720.4619,225.95 
Goodwill on consolidation (net)– 
Total assets4,70,445.394,96,577.105,74,820.486,36,011.177,12,792.96 

Efficiency Analysis

ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Advances / Loan Funds Ratio70.5671.7870.3770.4468.41
ROE / RONW17.2114.379.508.09(8.76)

Advances to Loan funds ratio: This ratio indicates the efficiency with which the bank is able to deploy the funds it mobilises and is arrived at by dividing the banks total advances by its total deposits (i.e. deposits + borrowings). A high advance to loan fund ratio indicates that the bank might not have enough liquidity to cover any unforeseen fund requirements; if the ratio is too low, banks may not be earning as much as they could be.

Return on Equity (ROE) or Return on Net Worth (RONW) : measures the amount of profit which the company generates on money invested by the equity shareholders (i.e. share capital + reserves and surplus). In short, ROE draws attention to the return generated by the shareholders on their investment in the business. ROE is widely used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Net Interest Income Rs.15,275.6816,737.8317,366.7716,473.28 15,335.77 
Growth (%)11.45 %9.57 %3.76 %(5.14 %) (6.91%) 
PAT (Rs. Cr.)4,927.243,534.623,341.42(3,663.27) 901.13  
Growth (%)(0.96 %)(28.26 %)(5.47 %)(209.63 %) 124.60 % 
Earnings Per Share – Basic (Rs. )28.0320.3218.78(19.32) 5.78 
Earning Per Share – Diluted (Rs. )28.0320.3218.78(19.32) 5.78 
Price to Earnings5.128.417.73– 26.14 

Dividend History

The Company has maintained an average dividend yield of 4.02 % over the last 5 financial years.

Liquidity and Credit Analysis

ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Net Interest Margin Ratio (“NIM”)3.523.443.152.60 2.38
Capital Adequacy Ratio12.7212.2912.2111.28 11.66
Net NPAs2.352.854.068.61 7.81

NIM: Banks focus on lending or advancing money at a rate higher than the rate at which they accept deposits. Net Interest Margin is calculated by dividing the difference between Interest earned (on advances) and interest expended (on deposits) by the amount of (average) Invested Assets. If this ratio rises from one period to the next, it indicates that the bank is able to deploy its funds more efficiently which results in greater profitability.

Capital Adequacy Ratio (CAR): or Capital to Risk Weighted Assets Ratio (CRAR) is a measure of a bank’s capital (net worth plus subordinated debt) expressed as a percentage of a bank’s risk weighted credit exposures (loans).

Two types of capital are measured: tier I capital, which can absorb losses without a bank being required to cease trading (such as ordinary share capital and free reserves); and tier II capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors (such as long term unsecured loans and revaluation reserves which is taken at a discount of 55 % while determining its value for inclusion in Tier II capital).

Measuring credit exposures requires adjustments to be made to the amount of assets shown on a bank’s balance sheet. This is done by weighting the loans made by a bank according to their degree of riskiness, e.g. loans to Governments are given a 0 %weighting whereas loans to individuals are weighted at 100 %. Similarly off-balance sheet items such as guarantees and foreign exchange contracts are also weighted for their riskiness. On-balance sheet and off-balance sheet credit exposures are added to get total risk weighted credit exposures.

As per the Basel II norms the minimum capital adequacy ratios that apply are:

Tier I capital to total risk weighted credit exposures to be not less than 4 %;

Total capital (Tier I plus Tier II less certain deductions) to total risk weighted credit exposures to be not less than 8%.

The RBI currently prescribes a minimum capital of 9 % of risk-weighted assets, which is higher than the internationally prescribed percentage of 8 %.

Applying minimum capital adequacy ratios serves to protect depositors and promote the stability and efficiency of the financial system.

For details on classification of tier I and tier II see http://rbidocs.rbi.org.in/rdocs/notification/PDFs/62CB300611FL.pdf

NPA: Non Performing Asset or NPA is a classification used by financial institutions that refer to loans that are in jeopardy of default. Once the borrower has failed to make interest or principal payments for 90 days the loan is considered to be a non-performing asset. Any rise in the percentage of NPAs results in a sharp decline in the overall profitability.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Punjab National Bank reported a promoter holding of 65.01 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 32.67 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.