Punjab & Sind Bank (PSB), with 926 branches is predominantly present in North and Central India. Its key strengths are: a) amongst the lowest NPAs in the PSU space (GNPA <1%), b) adequate capital (CAR at 13%), c) strong GoI holding (82% post dilution) and d) healthy returns ratio (avg RoE/RoA at 22%/1.0%). The geographical concentration in North India however has capped its loan-deposit ratio. With 9% YTD growth in its loan book, the bank is focusing on increasing the share of Retail and MSME portfolios. The capital restructuring done in late 2008 has enhanced book value of the bank to Rs111, translating into a valuation of 1.0x-1.1x trailing P/BV at the IPO price band.

PSB has established a rich presence in the agri-dominated state of Punjab. A lead bank in three districts of Punjab (Ludhiana, Faridkot and Moga), PSB operates through 402 branches. Cumulatively, Punjab accounts for ~16% of PSB’s total loans and ~24% of total deposits. Strong agricultural business and penetration in rural areas of North India has helped bank improve its priority sector exposure.

Minimal concerns on asset quality; PCR comfortable

Stringent provisioning norms and various recovery mechanisms (OTS, out of court settlement and SARFAESI Act) has enabled PSB to significantly reduce its GNPA from high of 8.4% in FY05 to 0.63% as at end FY10. GNPA from the real estate sector however remained high at 23%. With restructured loan portfolio at 2.8%, the bank’s PCR remains significantly higher at 87%.

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With CAR at 13%, PSB is well poised for a brisk balance sheet growth. Further, tie-ups with Aviva (for life insurance), Bajaj Allianz (for general insurance) and UTI MF (distribution of mutual fund product) should shore up its fee based income. While uncertainties over fresh pension liability remains; strong GoI parentage, dominant presence in North India, particularly in Punjab, and healthy returns ratio are the key positives. SUBSCRIBE.

PSB has outpaced the system loan growth, with loan book witnessing healthy 41% CAGR over FY07-10. This growth in loan book was led by sturdy rise in corporate loans which constituted >50% of book. Amongst corporate loans – Infra (18%), Real estate (17%), Textile (3%) and Iron & steel (3%) have the highest fund based exposure. In Retail (15% of book), >70% of exposure is towards home loans. With a view to increase its presence in Retail and MSME segments, the bank has set up 49 branches, catering primarily to the need of agricultural, personal and MSME segments.

Healthy loan growth in the past and geographical concentration in North and Central India resulted in increasing reliance on term deposits. With 52% CAGR in term deposits over FY07-10 (37% CAGR in total deposits), CASA ratio for the bank declined to 25%. Also LDR has remained in the narrow range of 65-74% for the past few years. While <2% of the existing branch network is on a CBS platform, the bank plans to extend the same to 53% of network by end-2012.

PSB is predominantly present in North and Central India, with rich presence in Punjab. Of the 926 branches as at end H1 FY11, 627 branches (68%) are in North India and accounted for 54% of total deposits and 62% of advances, respectively for the bank. LDR during H1FY11 remained high at 78%. With 402 branches in Punjab (43% of total branch network), deposits/loans from these branches constituted 24%/16% of total business. LDR, however, remained low at 44%. Going forward, the bank plans to expand its reach in North India. (30% of incremental branches)

PSB undertook a capital restructuring exercise during FY09. Accordingly, the equity base of the bank was dividend into Equity capital (Rs1.83bn), innovative perpetual debt instrument (Rs1.6bn) and perpetual cumulative preference share (Rs2bn) eligible as Tier I capital and Rs2bn of Perpetual non-cumulative preference shares (as Tier II) carrying a annual floating coupon rate benchmarked to the RBI repo rate.

Loan book breakdown – exposure primarily towards corporate segment  

Source: Company RHP, India Infoline Research