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Punjab & Sind Bank
Wealth Research, Unicon Financial Intermediaries. Pvt Ltd.
Company Report | IPO Note
Company Background
Punjab and Sind Bank (PSB) is a wholly owned entity of Government
of India. As of October 31, 2010, the bank had 926 branches, 63 ATMs
across India and sponsored a regional rural bank (Sutlej Gramin
Bank). PSB’s business grew by 37.9% y-o-y as of March 2010 with a
32.6% y-o-y growth in advances and a 41.7% y-o-y growth in
deposits over the same period.
Investment Rationale
• PSB to establish its pan India presence by opening new branches
throughout the country to increase its customer base and
business. Expanding of branch network is expected to help the
bank to improve CASA ratio going forward.
• PSB plans to open specialised industrial finance branches and
aims at expanding its credit portfolio, by growing its corporate
& retail loan segment.
• PSB has been able to reduce its net NPA ratio significantly from
8.11% (which was highest amongst the public sector banks) in
FY05 to 0.36% in FY10. Going ahead bank is likely to maintain
NPA ratios around this level.
• PSB will continue developing its technological capabilities to
enhance its value offering to customers while optimizing its costs.
From a total of 17 branches on the CBS platform, PSB seeks to
bring around 500 branches on the CBS platform by Nov 2012
enabling it to have incremental CASA growth and profitability
in future.
• PSB has maintained capital adequacy ratio (CAR) at 13.04% with
the tier-I capital at 7.9% and the tier-II capital at 5.1% as on
September 2010. The bank plans to meet its future capital
adequacy requirement through this issue.
Concern
• A major part of their branch network is concentrated in North
India and thereby exposing them to regional risks.
• PSB’s exposure to the real estate segment has witnessed substantial
increase in the last 3 fiscal years. Any significant downturn in
the real estate sector may lead to an increase in nonperforming
loans.
Valuation
In terms of valuation, the stock is offered at 0.9x and 0.8x book value
(post issue) at upper and lower band, respectively. Its peer group
valuation is in the range of 0.8-1-4x. The bank’s growth plans to
expand its business, products & services to benefit bank in long term.
Also, the strong Indian economic growth is likely to benefit the
overall banking industry which would inturn benefit the Punjab &
Sind bank. SUBSCRIBE.
Company Background
Punjab & Sind Bank (PSB) is a public sector banking institution having strong regional
concentration in Northern India. PSB is one of the 6 banks which were nationalised in April
1980. Its business is divided into retail banking, corporate / wholesale banking, priority sector
banking, treasury operations and other banking services such as agency functions for insurance
and mutual fund distribution, pension and tax collection services. Its loan products include
term loans to finance the capital expenditure of assets across various industries as well as
short-term loans, cash & export credit and guarantee. It also provides credit substitutes, such
as letter of credit and letter of guarantee. It offers direct financing to farmers for production and
investment, as well as indirect financing for infrastructure development and credit to suppliers
of agricultural inputs. The bank also offers a wide range of general banking services to its
customers including debit cards, cash management, remittance services and collection services.
Investment Rationale
• Wide Distribution Network and diversification of products & services
PSB has a pan India presence through 926 branches and 63 ATMs as on October 31, 2010. It
has a large presence in northern India with 623 branches, which is believed to be rich in
resources and offer great opportunity for resource mobilization. Out of these 920 branches
it has 49 specialised branches including specialised agriculture branches, personal banking
branches and MSME branches. PSB plans to expand its branch network which would result
in increasing the customer base, CASA ratio and business. It intends to focus on the technology
including the rollout of the core banking system and the launch of customer-centric and
multi-channel solutions like internet banking, telephone banking and mobile banking, to
support its network of branches. Thus, PSB within the periphery of banking business is
venturing and offering newer products and services which would augment growth and aid
in client acquisition.
• Strong asset quality & financial growth
PSB has been able to increase its business operations significantly, while improving its
asset quality. In fiscal 2005, PSB had net NPA ratio of 8.11% (highest amongst the public
sector banks) has been reduced to 0.36% in FY10 (group average of the public sector banks at
0.91%). Also the bank is likely to maintain NPA ratios around this level. The bank has
registered a CAGR of 21.1% in net total income, 35.6% in operating income and 15.1% in net
profit over the period 2006-2010. During the last five fiscals, it has been able to achieve a
CAGR of 36.24% in its net advances in spite of a reduction in net NPA ratio. Also, it has
registered strong RoA for fiscal 2010 at 1.06% and NIMs for fiscal 2010 was at 2.67%.
• Comfortable capital adequacy ratio
The bank’s capital adequacy ratio (CAR) as on September 2010 stood at 13.04% with the tierI capital at 7.98% and the tier-II capital at 5.06%. The bank plans to meet its future capital
adequacy requirement through this issue. During FY08 the equity capital of the bank was
restructured by converting an amount of INR 1.6 Bn into ‘Innovative Perpetual Debt
Instrument (IPDI), INR 2 Bn into Perpetual Non-cumulative Preference Shares (PNCPS) and
INR 2 Bn into Perpetual Cumulative Preference Shares (PCPS), while retaining INR 1.83 Bn
as the equity capital. The primary purpose of capital restructuring was to enable the bank
to raise fresh equity capital from the market.
• Accelerate growth in loans and advances to the retail and corporate sectors
Advances growth has been robust over the years & in FY10 PSB recorded 32.6% to INR
326.39 Bn growth YoY. PSB proposes to strengthen its relationship with large corporates
and public sector organizations by increasing funding to infrastructure sector. In order to
expand corporate banking services, it has recently forayed into syndication of loans. PSB
aims at expanding its credit portfolio by growing its corporate & retail loan segment. PSB
also plans to open specialised industrial finance branches to focus on project appraisal, to
maintain and enhance its franchise in the MSME.
• Continue to develop our technological capabilities
PSB will continue developing its technological capabilities to enhance its value offering to
customers while optimizing its costs. From a total of 17 branches on the CBS platform, PSB
seeks to bring around 500 branches on the CBS platform by Nov 2012. This would enable
PSB to have incremental CASA growth in future. The key objectives behind it is to build a
cost-efficient distribution network to accelerate the development of its retail and rural
franchise, enhancing cross selling & client segmenting capability by using analytical tools
& efficient data storage & retrieval systems, improving credit risk and market risk
management.
Concerns
• As on July 31, 2010, branches which are located in Punjab constituted 67.72% of total branch
network. PSB’s concentration in the northern region and specifically in Punjab exposes it to
any adverse geological, ecological, economic and/or political circumstances in that region as
compared to other public and private sector banks that have more diversified national
presence. Any disruption, disturbance or sustained downturn in the economy of Punjab
and other north-Indian states would adversely affect business, financial condition and
results of operations.
• As on March 31, 2010, housing finance loans, including NRI housing finance loans, represented
10.97% of PSB’s total loans outstanding in retail business segment. As on March 31, 2010 the
percentage of NPAs in real estate industry portfolio was 27.65%. PSB’s exposure to the real
estate segment has witnessed substantial increase in the last 3 fiscal years. Further, pursuant
to the Annual Financial Inspection Report by the RBI for FY 2009, company’s monitoring of
the real estate accounts was found to be deficient. Any significant downturn in the real
estate sector may lead to an increase in nonperforming loans, which may materially and
adversely affect PSB’s result of operations and financial condition
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