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Punjab & Sind Bank
ENAM DIRECT: IPO NOTE
Issue highlights
Punjab & Sind Bank (PSB) is a nationalized bank with
predominant exposure to North India. PSB acts as the
lead banker in 3 districts of Punjab i.e., Ludhiana,
Faridkot and Mogait. PSB currently operates approx. 926
branches and has 63 owned ATM’s and access to more
than 50,000 ATMs across the country for its customers.
PSB’s has significantly improved its operational and
efficiency metrics over the last 5 years. For instance, bank
successfully lowered its NPA levels from record high of
8.4% in FY 05 to 0.36% in FY 10. CAR stands healthy at
13.04% whereas business per employee has improved
from Rs 4.67 cr in FY 08 to Rs 9.63 cr in FY 10.
PSB is planning to broaden its product base and service
offering to its clients. For instance; PSB proposes to roll
out internet banking systems, mobile banking, install
new ATMs, provide clients loan syndication, and higher
focus on high margin agency and distribution
agreements amongst others. All these measures are
expected to augment growth and profitability going
forward.
PSB has achieved stellar financial performance in previous
fiscals. 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.
CARE has graded 4/5 for the PSB IPO indicating that the
fundamentals are above average relative to other listed
equity securities in India.
Objects of the issue (Rs cr)
Objects Amount
Augment capital base to meet the capital adequacy
norms for future capital requirements and the
growth in assets
Issue highlights
Issue size: Rs 452--480 cr
No. of shares : 4,00,00,000 shares
Issue summary
Price band: Rs 113--120 per share*
Issue opens: Dec 13, 2010
Issue closes: Dec 16, 2010
Bid Lot : 50 shares
Lead managers: ENAM Securities, SBI
Capital, ICICI Securities
Registrar: Link Intime India Pvt. Ltd.
*Retail investors are entitled to 5% discount on issue
price
BACKGROUND
Company and promoters
Incorporated in June 1908; Punjab & Sind Bank (PSB) is one of the 6 banks nationalized by
the GoI in 1980. PSB’s network comprises of 926 branches and 63 ATM’s with an
employee base of approx. 8,116. PSB’s total capital ratio as on FY 10 was 13.1% and its
Tier 1 capital ratio was 8.0%.
PSB being a public sector enterprise will continue to be under administrative control of
GoI even post issue of equity shares. Backed by the GoI; investors get a sense of security
and assurance in terms of long term sustainability of the company.
BUSINESS OVERVIEW
PSB’s business revolves around banking operations and agency functions
Retail Banking:
PSB offers a full range of current, savings and term deposits to its retail customers with a
total deposit base of Rs 52,945 cr on Sept 2010.
PSB has identified the growth of loans and advances to the retail sector as a priority
initiative in the past few years. As of March 2010, total outstanding retail loans were Rs
5,487 cr which represented 15.3% of total outstanding loans and advances.
The Bank offers housing finance for loans up to Rs 1.5 cr against mortgage of property to
individuals for construction, acquisition, purchase, renovation or repairing of houses.
PSB has also formulated a Reverse Mortgage Scheme which allows the senior citizens to
make a residential property earn while they continue to live in it. This scheme gives a
regular fixed amount based on the value of the property which helps the senior citizens
to supplement their income and sustain their lifestyle.
PSB also offer personal vehicle loans for purchase of new or pre-owned cars and other
vehicles including 2 wheelers. The Bank has signed MoU with Tata Motors Ltd. on Feb
2010 and with Maruti Suzuki India Ltd on Feb 2009, for financing commercial vehicles.
PSB also provides for education loans, personal loans and other services (for instance
recently received approval of the RBI for import of gold and silver under the Foreign
Trade Policy 2009-14).
Corporate Banking:
PSB offers a wide array of products and services to corporate clientele which includes;
PSB offers term loans which are typically secured by the project assets (which are
financed by loan) and personal property, as well as by other assets of the borrower
wherever required. Bank also offers revolving credit facilities secured by working
capital assets, overdrafts, working capital demand loans, working capital term loans and
bill discounting facilities. Company also provides loan facilities in foreign currencies to its
customers.
PSB also is equipped to offer export credit, import finance, letter of credit and
guarantees to its clients who are involved in the business of export and import.
As of Sept 2010, total outstanding corporate loans were Rs 20,328 cr which represented
56.6% of total outstanding loans and advances.
Priority Sector Banking:
In consonance with national policies and priorities, as reflected in the guidelines issued by
the RBI, PSB is required to lend at least 40% of its adjusted net bank credit or credit
equivalent to off-balance sheet exposure, whichever is higher to the priority sector,
including at least 18% to the agricultural sector.
As a measure of commitment to priority sector lending, over 45% of PSB’s branches are
located in rural and semi-urban areas.
Treasury Operations
PSB’s treasury department manages its treasury operations on a day-to-day basis subject
to supervision. Through treasury operations, bank manages its funds, invest in debt and
equity products and maintain required regulatory reserves. Company also runs a
proprietary trading book in debt, equity and foreign exchange within the framework of
treasury policy. Treasury operations also include a range of products and services for
corporate customers, such as forward contracts, currency swaps and foreign exchange
products and services.
Other Banking Services
PSB has entered into contract agency agreements for distribution of non-life insurance
products with Bajaj Allianz in 2003, and for distribution of life insurance products with
Aviva LIC India Pvt. Ltd. on Sept 2004.
Bank has also entered into a distribution agreement in 2005 with UTI AMC for
distribution of mutual fund products.
Strategy
PSB is a mid-sized bank with predominant presence in North India. Company
seeks to leverage its strong brand recall, especially in North India, to expand its
presence across other geographies in India, including through increasing branch
network and distribution infrastructure across India and cross-selling products at
competitive costs, to gain a larger market share in terms of advances as well as
deposits.
PSB seeks to increase CASA deposits in order to reduce cost of funds and
improve core capital. In order to attract retail customers and increase CASA
deposits, through marketing campaigns and upgrading branch offices company
intends to increase its brand recognition. Company also intends to formulate
certain incentive schemes to encourage customers to deposit money in current and
savings accounts. They have also formed a special cell exclusively for performance
review and monitoring of CASA growth. Moreover convenient retail banking
services such as the proposed roll out of CBS, internet banking systems, mobile
banking and installation of new ATMs and the recently completed linking to NFS
will attract retail customers.
In order to expand corporate banking services, PSB has recently forayed into
syndication of loans. Company believes that with the successful completion of the
Issue, company will be able to increase capital funds which will increase exposure
limits and attract high quality corporate clients. Company also plans to open
specialized industrial finance branches to focus on project appraisal. As part of
this strategy, PSB will maintain and enhance its franchise in the MSME sector.
PSB is focusing on increasing high margin fee-based income by expanding third
party product offerings and by increasing fee-based services. Company has
entered into several mutual agreements such one with UTI AMC for the
distribution of mutual fund products; one with Aviva Life Insurance Co. to market
and sell the life insurance products of and one with Bajaj Allianz for general
insurance products. Company has also launched in July, 2005 Western Union
Money Transfer service.
The key objectives behind IT strategy continue to include building a cost-efficient
distribution network to accelerate the development of retail and rural franchise,
enhancing cross-selling and client segmenting capability by using analytical tools
and efficient data storage and retrieval systems, improving credit and market risk
management, improving product and client profitability, and leveraging
technology competencies and cost efficiencies.
ISSUE PROFILE
Positives
Superior asset quality; stringent risk management & stellar financial
performance:
PSB has experienced robust financial growth over last 5 years. During the last five
fiscals, bank has been able to achieve a CAGR of 36.2% in net advances. This
superior growth was achieved along with a reduction in net NPA ratio from 8.11%
in FY 2005 to 0.36% in FY 2010. Thus the bank has been able to significantly increase
its business operations, while at the same time improving asset quality.
It is evident from the table above that PSB has outperformed group average of the
public sector banks as well as all banks’ average for FY 2010 on several financial and
risk management parameters despite currently being much smaller in size than
many of the public sector and other banks. Thus, PSB’s turnaround performance
and stringent risk management technique is expected to bolster company’s financials
going forward.
Product and service diversification coupled with improved infrastructure to
augment growth:
Although PSB has been present across various business segments; with its aim to
geographically diversify and compete aggressively with dominant players; PSB is
planning to broaden its product base and service offering to its clients. The
following are a few of the steps taken;
1) PSB proposes to roll out internet banking systems, mobile banking and install
new ATMs.
2) PSB has recently forayed into syndication of loans.
3) Open specialized industrial finance branches to focus on project appraisal.
4) PSB has entered into a MoU dated Sept 2010 with the Unique Identification
Authority of India to provide assistance in the implementation of project.
5) Higher focus on agency and distribution agreements and by promoting certain
products and services including the issuance of letters of credit and guarantees
and depositary services.
6) From a total of 17 branches on the CBS platform; PSB seeks to bring up to 500
branches on the CBS platform by Nov 2012.
Thus, PSB within the periphery of banking business is venturing and offering newer
products and services which will augment growth and aid in client acquisition.
PSB with its strong branch network and leading banker in North India has
huge opportunity to replicate its success pan-India in long term:
PSB currently operates approx. 926 branches and 63 ATM’s with a predominant
presence in North India. Considering its ATM network isn’t currently strong;
Management has recently joined the NFS which will allow access to more than
50,000 ATMs across the country to its customers. PSB with its sheer size and wide
branch network can replicate its success in broadening its horizon across regions in
India and effectively compete with regional and national players. Moreover,
considering its existence is over 100 years; and is the lead banker in 3 districts of
Punjab i.e., Ludhiana, Faridkot and Mogait. Thus PSB has successfully created a
niche brand which it can leverage to develop new ties, explore new regions and
generate business.
Stellar financial performance in previous fiscals
PSB has achieved stellar financial performance in previous fiscals. 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.
Risk factors
As of 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 them 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 could
adversely affect business, financial condition and results of operations.
As at 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 of
March 31, 2010 the % 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 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 results of
operations and financial condition.
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