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Punjab & Sind Bank: IPO – Subscribe
Strong business growth, but at the expense of CASA: During the past five years, the
Punjab & Sind Bank witnessed strong growth in business, with advances growing at a
robust 36.2% CAGR and deposits increasing at a 28.2% CAGR. Growth over the past five
years was ~1.5–1.6x the industry growth, which resulted in market share gains in both
advances and deposits. The bank was able to sustain NIMs in excess of 3.0% for the past
five years, except for FY2010 (2.7%). However, the CASA ratio fell down from 52.1% in
FY2006 to 25.1% in FY2010. Going forward, considering the low CASA ratio in the
current rising interest rate environment, NIMs are expected to be under pressure.
Robust asset quality: Punjab & Sind Bank had one of the highest net NPAs (8.1%) in the
industry in FY2005, which were brought down to one of the lowest in the industry (0.4%) in
FY2010. In terms of slippages also, the bank has been able to keep slippages well within
1.0% over FY2007–10, which is commendable compared to its peers that saw their
slippages jump up during the subdued growth environment of FY2009. Recoveries from
written-off accounts have been strong ranging from `100-200cr each during FY2007-10
and `64cr in 1HFY2011. The bank has a PCR (86.8%) well in excess of the required ratio
(70%), providing further buffer from asset-quality pressures.
Attractive valuations: For growth in advances, Punjab & Sind Bank sacrificed the low-cost
deposits base, which is expected to lead to NIM pressures in the current rising rate
environment. Considering the recent hikes in FD rates by many banks and the resultant
sharp correction in stock prices, especially of low CASA banks, the timing of the issue
seems somewhat inopportune. However, in our view, the attractive pricing of the issue
even at the upper end of the band factors in the same and leaves ~21% upside, when
compared to relative valuations of peers with similar low CASA ratio. The bank’s peers are
trading between 0.9x and 1.1x FY2012E ABV; while at the upper end of the price band
(`120), the bank will trade at 0.8x FY2012E ABV. Hence, we recommend a Subscribe to
the issue on account of the relatively cheap valuations with a Target Price of `145, valuing
the bank at 1.0x FY2012E ABV.
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