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Punjab and Sind Bank
Feedback from IPO analyst meeting
Event
IPO opens on Dec 13th, implied market cap of $560–600m: We attended
the analyst meet of Punjab and Sind Bank – the only unlisted PSU bank in
India. The bank is intending to issue 40m shares with a price band fixed at
Rs113–120 implying a market cap of $560–600m and constituting 18% of
post issue share capital.
Impact
Asset quality has been impressive: The bank has gross NPLs of less than
1% and historically has shown a good track record of containing slippages
and posting high recoveries. NPL coverage ratio is very healthy at 86% – far
higher than most PSU banks in India. Recovery rates are expected to be
higher from the written-off accounts as they hold collateral worth Rs25bn
whereas the written-off amount is around Rs9bn. Restructured assets also are
around 2.7% of the loan book, which is less than the industry average of 4–
5%.
Low CASA is an issue: Management admitted that the bank’s CASA ratio at
25% is one of the poorest amongst PSU banks and the rapid fall in CASA
from 50% four years ago is mainly on account of taking higher recourse to
bulk deposits to fund growth and poor state of technology.
Top management retirement an issue: Management admitted that the
retirement of GMs is an issue. Around 9 out of 10 GMs are expected to retire
over the next 18 months. The bank currently does not have a Chairman and
the Executive Director is heading the bank.
CBS implementation is on the right track: After some initial hiccups, the
bank has embarked on a CBS (core banking solution); it has brought in 30%
of its business under CBS and expects this figure to reach 60% over the next
2–3 quarters.
The second option of pension: Out of 8,000 employees (workforce), 3,000
had opted for PF who will now go for pension and around 700 ex-employees
are eligible for pension. Management did not put a number to the pension
obligation. Needless to say, in our view, the impact could be substantial
considering 40% of the workforce was not on pension. But even if we assume
the impact on net worth is 10–15%, the stock is priced attractively at 0.9x
FY12E P/BV after adjusting for the pension impact.
Return metrics in line with industry: The bank reports an ROA of 1% which
is in line with the mid-cap PSU banks’ ROA. Reported RoE of 30% is high
mainly on account of capital restructuring where the government converted
the existing equity capital to hybrid debt and preference shares. As a result,
the leverage is 30x (assets to equity multiple) compared to 15–16x for most
PSU banks.
Outlook
Issue is priced attractively: Based on annualising 1H11 profits and
assuming a 10% growth in profits in FY12 over FY11, Punjab and Sind Bank
is priced in the range of 0.74–0.78x FY12E P/BV, which represents a 20–25%
discount to the mid-cap PSU bank universe consensus estimate (Bloomberg).
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