Punjab & Sind Bank IPO - Sushil Finance assigns 'A' rating

Punjab & Sind Bank is coming out with Public offer of 4,00,00,000 equity shares of Rs. 10 each for cash at a price band of Rs.113 to Rs.120 per equity share through 100% book building process. The issue comprises a net issue to public of 3,80,00,000 equity shares and a reservation of 20,00,000 equity shares for subscription by eligible employees, at the issue price. The issue shall constitute 17.9% of post-issue share capital of the bank. The net issue shall constitute 17.0% of post-issue share capital of the bank.

COMPANY OVERVIEW

Punjab & Sind Bank (P&S Bank), nationalized in June 1980, is a public sector bank with focus in Punjab & other northern regions and business size of Rs. +0.8 trillion. As of Oct' 10, it has 926 branches and 63 ATMs across India with 43% branches located in Punjab. The bank also sponsors one regional rural bank, Sutlej Gramin Bank, in collaboration with the GoI and the state Government of Punjab. As on Sep' 10, it had a total of 8,047 employees serving over 6.6 million customers.

HIGHLIGHTS

- Advances book has grown at a CAGR of +36.2% over FY05-10, much ahead of industry average, whereas deposits grew at 28.2% CAGR. Credit-Deposit (CD) ratio has also improved substantially in this period from 44% in FY05 to 66% in FY10.

- P&S Bank's funding cost (6.2% in FY10) is higher to that of industry average (5.4% for all nationalized banks) which was largely due to lower share of CASA deposit (currently 25%) and higher reliance on bulk deposits.

- As on H1FY11, P&S Bank's NIMs were decent at 1.5% (3% annualized). Agriculture accounted for 12.5% of loan book, SME was about 18% and Retail accounted for 15% as on H1FY11. Of the Retail loan portfolio, Housing Finance accounted for 71% and Personal loans for 21%. Low margins are also a result of low Credit to Deposit ratio of 66%.

- Gross and Net NPAs declined drastically from 17.1% and 8.1% in FY05 to 0.9% and 0.4% in Sep'2010 respectively due to active monitoring of assets and focus on recovery. Its coverage ratio currently stands at 56% but after considering technical write-offs, its coverage ratio stands at +86% (including floating provisions). Slippages witnessed during FY10 were at 0.6% of advances and during H1FY11 at 0.5% of advances (annualized).

- Bank has restructured advances worth Rs. 9.70 bn (as on Sept'10), which is about 2.7% of its book (lower than industry average). As on Sept'10 28% of loan portfolio consisted of loans to public sector enterprises and public sector undertakings and Exposure to 10 largest corporates is at 15% of total advances.

- During FY10, P&S Bank reported advance growth of 33% YoY and deposit growth of 42% YoY, much ahead of industry average. However, NII growth was lower at 17% YoY led by compression in margins. Operating profit grew only by 19% YoY due to higher interest expenses, lower core fee income and lower treasury income. Excluding Treasury income, operating profit grew by 24% YoY.

- Operating cost to Income ratio improved to +48% in FY10 from 67% in FY06. This is lower than industry average (50% for all nationalized banks). Lower core fee income and higher provisioning has resulted in fall in ROAs for the bank from +1.7% in FY06 to 1% currently.

- Relatively high AFS portfolio of 28% (Avg. duration of 3.1 years) may result in high earningsvolatility, in line with the movement of G-sec yields.

- P&S Bank intends to expand its branch network to other geographies (North region comprises 67% of branches). The Bank intends to launch customer-centric and multi-channel solutions like internet banking, telephone & mobile banking. The Banks first CBS branch became operational in Jun'10 and currently 30% of its business is generated from CBS Branches. It further seeks to bring 500 branches on CBS platform by Nov'12.

- The objects of the issue (Rs. 4800 mn) are to augment capital base to meet future capital requirement and general corporate purposes.

- Considering its post issue paid up equity, at the higher band (of Rs. 120), the stock is available at P/ABV of 1.1x Sept'10 adjusted book value.The bank is well placed among its peers in terms of operating efficiency, asset quality & margins. We assign a "A" Rating to the IPO and recommend our investors to subscribe the Issue due to its strong business growth, good regional focus, strong liability franchise, High ROE and attractive pricing.

Source : Equity Bulls

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