Punjab & Sind Bank IPO - Cheap Valuations - Angel Broking

Strong business growth, but at the expense of CASA: During the past five years, Punjab & Sind Bank (PSB) witnessed strong growth in business, with advances growing at a robust 36.2% CAGR and deposits increasing at a 28.2% CAGR. Growth over the past five years was ~1.5–1.6x the industry growth, which resulted in market share gains in both advances and deposits. The bank was able to sustain Reported NIMs in excess of 3.0% for the past five years, except for FY2010 (2.7%). However, the CASA ratio fell down from 52.1% in FY2006 to 25.0% in FY2010. Going forward, considering the low CASA ratio in the current rising interest rate environment, NIMs are expected to be under pressure.

Robust asset quality: PSB had one of the highest net NPAs (8.1%) in the industry in FY2005, which came down to one of the lowest in the industry (0.4%) in FY2010. In terms of slippages also, the bank has been able to keep slippages well within 1.0% over FY2007–10, which is commendable compared to its peers that saw their slippages jump up during the subdued growth environment of FY2009. The bank also has ~Rs.900cr of technically written off accounts, which provides a large pool for recoveries which will go straight to income. Already recoveries from written-off accounts have been strong, ranging from Rs.100cr–200cr each during FY2007–10 and at Rs.64cr in 1HFY2011. The bank has a PCR (86.8%) well in excess of the required ratio (70%), providing further buffer from asset-quality pressures.

Attractive valuations: The bank's low CASA ratio is expected to lead to NIM pressures in the current rising rate environment. Considering the recent hikes in FD rates by many banks and the resultant sharp correction in stock prices, especially of low CASA banks, the timing of the issue seems somewhat inopportune. However, we believe the issue's attractive pricing factors in the expected NIM pressures, when compared to relative valuations of peers with similar low CASA ratio. The bank's peers are trading between 0.9x and 1.1x FY2012E ABV; while at the upper end of the price band (Rs.120), the bank will trade at 0.8x FY2012E ABV. Valuing the bank at 1.0x FY2012E ABV would imply 21% upside from the upper end of the price band. Hence, we recommend a Subscribe to the issue on account of the relatively cheap valuations.

Source : Equity Bulls

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