Aditya Birla Money recommends Subscribe to Punjab & Sind Bank IPO

Company background and business model

Punjab & Sind Bank (PSB) is a GoI undertaking, incorporated in June 1908 in Amritsar. The bank's business is principally divided into retail banking, corporate banking, priority sector banking, treasury operations and other banking services such as agency functions for insurance, distribution of mutual funds and pension and tax collection services. PSB is a mid-sized bank with a presence predominantly in north India. As on October 30, 2010, the bank's network comprised of 926 branches and 63 ATMs across India. CARE has graded 4/5 for the PSB IPO indicating that the fundamentals are above average relative to other listed equity securities in India.

Key strengths

Strong asset quality and healthy provision coverage ratio — PSB has a strong asset quality with gross NPA of Rs.3314.3 mn as of September 30, 2010, representing 0.92% of its gross advances. Net NPAs were Rs.1559.0 mn as of September 30, 2010, representing 0.44% of its net advances. The bank has experienced significant improvement in asset quality over the last five years (NNPA of 8.18% in FY05). Added to this, 51.13% of the bank's standard advances were to borrowers in the low risk category, 43.38% of advances were to borrowers in the moderate risk category and only 0.44% of advances were to borrowers in the high risk category. The bank provision coverage ratio stood at 86.83% (including technical write-offs) as on September 30, 2010 well above the stipulated provisioning requirement of 70.0% prescribed by the RBI.

Robust Business and financial growth — The bank have experienced robust growth in advances and deposits, with total advances growing at a CAGR of 36.24% over the last five fiscals, and total deposits growing at a CAGR of 28.24% over the same period. The growth in deposits was mainly fuelled by term deposits as a result of which CASA deposits of the bank came down significantly. Going forward the management has indicated that the bank will focus on improving operational efficiency coupled with share of low cost CASA deposits. On the financial performance front also the bank has demonstrated robust growth which can be gauged from the fact that PAT increased at a CAGR of 46.6% from Rs.1083.3 mn in FY06 to Rs.5011.3 mn in FY10 and earnings per share of the company increased from 1.46 in FY06 to 27.4 in FY10. Consequently, Return on net worth (RONW) of the company has increased from 15.34% in FY06 to 29.41% in FY10.

Established experience and long standing relationships with customers — With over 100 years of banking experience, PSB has built strong relations with the central and state governments as well as public sector enterprises, which have been important growth drivers. Added to this, high government holding at ~82.0% post issue gives enough headroom to the bank to raise further capital in future, if required.

Outlook and Valuations

At the upper price band of Rs.120 and lower price band of Rs.113, the issue is attractively priced at around 0.71 times and 0.67 times its FY12E ABV of Rs.169.0. Currently, the bank's peer group is trading between 0.9x - 1.1x their FY12E ABV. On its post issue ABV of Rs.121.3, the issue is priced at around 0.99 times and 0.93 times (at the higher and lower band respectively). The bank may face near term headwinds in the form of margin pressure, delay in CBS implementation and subdued profitability due to provisioning towards pension obligation. However, considering the bank's strong asset quality, healthy provision coverage ratio, robust business growth and prudent risk management policies we believe PSB will emerge as a strong small cap bank going forward. Considering the attractive pricing and future growth strategies of the bank we recommend SUBSCRIBE to the issue.

Source : Equity Bulls

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