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IPO ANALYSIS
PUNJAB & SIND BANK- SUBSCRIBE
Punjab & Sind Bank: Subscribe
Fairwealth Research Desk rates the Initial Public Issue
(IPO) of Punjab & Sind Bank - Subscribe. The issue will
open on Dec. 13, 2010 and close on Dec. 16, 2010 for retail
investors and on Dec. 15, 2010 for Institutional Investors.
The face value is Rs. 10 per share and the price band for the
issue is Rs 113-120. It has offered 5% discount of the price
band to retail investors. It is a 100% book building process
aggregating over Rs 480cr.
Punjab and Sind Bank (PSB) is one of the 19 nationalized
banks in India. Punjab and Sind Bank has significantly grown
their branch network with a presence predominantly in north
India. The bank network comprised of 933 branches and 73
ATMs across India. The bank also sponsors one regional
rural bank, Sutlej Gramin Bank, in collaboration with the GOI
and the State Government of Punjab.
VALUATIONS
On the price band of Rs 113-120, company is available at
P/E of 4.08x on the lower price band and 4.34x on the higher
price band based on FY10 earnings. At the book value of
Rs.104.89, the stock is priced at P/BV of 1.14x on the higher
price band and 1.08x on the lower price band. PSB has a net
worth of Rs 1920.62cr.
We expects Punjab & Sind Bank’s Capital Adequacy Ratio
(CAR) to increase to over 15% after raising Rs. 480cr
(Approx) through its initial public offer (IPO). The main object
of this IPO issue by PSB is to augment its capital base to
meet its capital adequacy norms for capital requirements.
Long term investors can consider the IPO with an
expected return of 35-45% with a time horizon of 12-24
months whereas short term investors can expect listing
gains of 15-20%.
COMPANY PROFILE
Punjab & Sind Bank is a GoI undertaking, incorporated in June 1908 in
Amritsar. Bank was one of the six banks nationalized by the Government
of India in April 1980, and today, the Bank is one of 19 nationalized
banks in India. In over 100 years of operation, Punjab and Sind Bank has
significantly grown our branch network with a presence predominantly in
north India. As on Sept 30, 2010, Bank’s network comprised of 933
branches and 73 ATMs across India. Punjab and Sind Bank also
sponsor one regional rural bank, Sutlej Gramin Bank, in collaboration
with the GoI and the state Government of Punjab.
As on July 31, 2010, Bank had 8,116 employees, serving over 0.60cr
customers. Bank’s primary business is taking deposits and making
advances and investments, and is principally divided into retail banking,
corporate banking, priority sector banking, treasury banking and other
banking operating such as agency function for insurance, distribution of
mutual fund and pension and tax collection services. Bank has various
deposits product such as current, saving and term deposits for our
customers. Bank also provides credit substitutes such as letter of credit,
and guarantee. PSB is also engaged in syndication of loans provided by
other financial institutions and other fee based services such as cash
management and remittance services. In the priority sector, bank offers
direct financing to farmer for production, as well as indirect financing for
infrastructure development and credit to suppliers of agricultural inputs.
INVESTMENT RATIONALE
Wide Distribution Network and Infrastructure
Punjab & Sind bank delivers product and services through a wide variety
of distribution channel ranging from bank branches and ATMs. Bank has
enviable branch network across India, with a presence predominantly in
North India, a region which is rich in resources an
opportunity for resource mobilization. At present,
network comprises 933 branches and 73 ATMs
theses 933 branches, PSB has 49 specialised branches including
specialised agriculture branches, personal banking branches
small & medium enterprises (MSMEs) branches and one locker branch
to cater to customers.
Value Configuration
Punjab & Sind Bank operates in highly automated environment in term
of information technology and communication system. Bank is planning
to alter their all branches in Core Banking Solution (CBS) system which
enables the bank to offer speedy funds transfer facilities to its customer
Multi-branch access is also providing to retail through the branch network
and Automated Tailor Machine (ATM).
Revenue Stream
Bank is a financial institution licensed by Govt. Its primary activities
include borrowing and lending money. Bank is an
financial market and offers financial services such as investment fund,
insurance, forex, debit & credit card, NRI account & deposits. Punjab &
Sind Bank provides loan in terms of retail banking and
banking. In retail banking, bank provides loans and advances to housing,
trade, automobiles, consumer durables, education and personal loan.
Bank provides commercial banking products and services to corporate
customers, including mid-sized and small businesses and government
entities.
Streamlined Risk Management Control
Punjab & Sind Bank has a separate Risk Management Department to
formulate and implement credit risk evaluation and risk management
policies, procedures and methodologies appropriate to the business
within each division and to ensure that the business condu
each division is consistent with bank’s risk appetite, with a focus on
enhancing asset quality. Bank periodically conduct audit to ensure that
the risk on the portfolios are within acceptable parameters.
Strong Assets Quality
The Non Performing Assets (NPA) of the bank has declined significantly
since 2005 from the levels of 8.11% to 0.36% currently on th
improved advances mix coupled with strong credit policy followed by
PSB. The bank’s provisional policies for the specif
remained higher than the regulatory requirement. Punjab & Sind Bank is
maintaining provisioning coverage ratio of 90% as on March 31, 2010.
Stringent Provision Coverage Ratio
The RBI has pursuant to its second quarter review of Monet
fiscal 2010 prescribed that all schedule bank are required to provide for a
total provisioning coverage ratio of minimum of 70% of NPAs. Punjab &
Sind Bank is maintaining provisioning coverage ratio of 90% as on March
31, 2010. We expect the bank to continue with same provisioning
thereby no further pressure on the bottom-line.
CARE Rating
Rating agency ‘Care’ has assigned IPO grade “4/5”, indicating above
average fundamentals to the proposed public offer of Punjab & Sind
Bank, the only unlisted nationalized bank. The grading derives strength
from 100% Government of India ownership of the bank, long track record
of operation of over 10 decades, its established position in northern India
and expanding network of branches and ATMs.
Robust Financial Performance
In fiscal 2005, bank’s net NPA ratio was 8.11% which was
amongst its peer group. However in fiscal 2010, NPA ratio has declined
to 0.36%. The bank’s provisional policies for the specific loan loss
provision remained higher than the regulatory requirement. Return on
Assets and Net Interest Margin of the bank was 1.06% and 2.67%
respectively for fiscal 2010. Net profit of the bank grew by 17.81% to
506.82cr for FY10 as against 430.2cr for FY09. Further, the bank has
been able to significantly increase its business operation
same time improving their asset quality. During the last five fiscals, bank
has been able to achieve a CAGR of 36.24% in term of net advances
and total deposits grew at a CAGR of 28.24% over the last five fiscal.
INDUSTRY OVERVIEW
The Reserve Bank of India (RBI) is the central regulatory and
supervisory authority for the Indian financial system. A variety of financial
intermediaries in the public and private sectors participates in India’s
financial sectors. These financial institutions include
ü Commercial Banks
ü NBFC
ü Long-term
ü lending institutions
ü Insurance Companies
ü Mutual Funds
Reserve Bank of India (RBI)
The RBI, established in 1935, is the central banking and monetary
authority in India. The RBI manages the country’s money supply and
foreign exchange and also serves as a bank for the GoI and for the
country’s commercial banks.
The RBI issues guidelines on exposure limits, income recognition, asset
classification, provisioning for non performing and restructured assets,
investment valuation and capital adequacy for commercial banks, long
term lending institutions and non-bank finance companies. T
requires these institutions to furnish information relating to their
businesses to it on a regular basis.
Commercial Banks
Commercial Banks in India provide banking facilities to individuals and
business entities. As of June 30, 2009, there were 167 scheduled
commercial banks in the country, with a network of 64,608 branches
serving approximately Rs. 40,63,203 crore in deposit accounts and Rs.
30,00,906 crore in loan accounts. Scheduled commercial banks are
banks listed in the schedule to the Reserve Bank of India Act, 1934,
(“RBI Act”) and are further categorised as public sector banks, private
sector banks and foreign banks. Scheduled commercial banks have a
presence throughout India,with approximately 56.03% of b
located in rural or semi-urban areas of the country.
Public Sector Banks
Public sector banks make up the largest category in the Indian banking
system. They include the State Bank of India and its seven associate
banks, 19 nationalised banks and IDBI Bank Limited. The public sector
banks continue to be a dominant part of the banking system. The public
sector banks have 55,438 branches, and account for 76.6 per cent of the
aggregate deposits and 75.3 per cent of the aggregate advances of the
scheduled commercial banking system as of March 31, 2009. The public
Sector banks’ large network of branches enables them to fund
themselves out of low cost deposits. The State Bank of India is the
largest public sector bank in India. As of March 31, 2009, the State Bank
of India and its associate banks had 16,062 branches. They accounted
for 24.8% of aggregate deposits and 24.6% of the aggregate advances
of all scheduled commercial banks.
Private Sectors Banks
In July 1993, as part of the banking reform process and as a measure to
induce competition in the banking sector, the RBI permitted entry of the
private sector into the banking system. This resulted in the introduction of
nine private sector banks. These banks are collectively known as “new”
private sector banks. As of March 31, 2009, there were 22 private sector
banks, of which seven were “new” private sector banks and 15 were old
private sector banks existing prior to January 1993. As of March 31,
2009, private sector banks accounted for approximately 18.1% of
aggregate deposits and 19.02% of aggregate advances of the scheduled
commercial banks. Private sector banks had a network of 8,877
branches, accounting for 13.73% of the total branch network of
scheduled commercial banks in the country
Foreign Banks
As of March 31, 2009, there were 31 foreign banks with 293 branches
operating in India, accounting for 5.3% of aggregate deposits and 5.5%
of aggregate advances of scheduled commercial banks. As part of the
liberalisation process, the RBI has permitted foreign banks to operate
more freely, subject to requirements largely similar to those imposed on
domestic banks.
KEY CONCERN:
Consolidation in the Banking Sector
The GoI has expressed a preference for consolidation in the banking
sector in India. Merger among public sector banks may result in
enhanced competitive strength in pricing and delivery channel for
merged entity. If there is liberalization of the rules for foreign investment
in private sector banks, this could result in consolidation in the banking
sector.
High Inflation and tight Monetary Environment
High inflation and tight monetary environment acted as primary
dampeners for consumption at the time of recession, At the time of the
high inflation, RBI rise the key policy rate like CRR. SLR, Repo, Reverse
Repo etc to tame inflation. Banks have to face tight liquidity situation at
the time of the high inflation
SARFAESI ACT
SARFAESI Act is also a challenge faced by banks as it restricts the
banks not to follow any stringent means of recovery of loan.
Advanced Technology
Technology is a key driver in the banking industry which revolutionized
the distribution channel of the banks. Banks which have not made any
adequate investment in technology faced a fall in market shares. There
is also a challenge faced by PSB is to derive the maximum advantage
from their investment in technology and avoid using inconsistent
technology.
Industrial Performance
PSB’s credit exposure to borrowers is dispersed across various sectors
including, infrastructure, real estate, textile, iron and steel, petroleum,
construction, cement, chemicals and chemical products, engineering and
other industries. Banks funded exposure in the infrastructure sector,
which is the largest industry, as of March 31, 2010 was Rs. 5,926.90cr
which constituted 18.11% of Psb total funded exposure.
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