Punj Sind Bank

Punjab & Sind Bank is entering the capital market on 13^th December 2010 with a fresh issue of 4 crore equity shares of Rs. 10 each in the price band of Rs. 113 to Rs. 120 per equity share, where retail and employees get a 5% discount. The issue constitutes 17.93% of post-issue paid-up capital of the bank, which closes on 15^th December for QIBs and on 16^th December for retail and HNIs.

Punjab & Sind Bank is among the last PSU banks to hit the primary markets. Having banking experience of over 100 years, its network of 926 branches and 63 ATMs (as of 31-10-10) serve over 6.6 million customers, mainly in North India, through 627 branches located in North India, including 402 branches in Punjab alone. Since it is more of a regional bank, its credit off-take is quite low vis-a-vis the deposit inflow. As of 30^th September 2010, banks' total advances stood at Rs. 35,715 crore while total deposits were at Rs. 52,945 crore, of which 75.86% were term deposits. In other words, bank's CASA ratio stands at a moderate 25.14%.

Rs. 443-471 crore which the bank expects to raise via the IPO will help its augment capital base to adequately maintain and improve the capital adequacy ratio. Post-issue, Government holding will reduce from the present 100% to 82.07%.

The bank has been showing healthy year-on-year growth. For FY10, it reported total income of Rs. 4,326 crore and net profit of Rs. 510 crore, implying an EPS of Rs. 27.38. The capital adequacy ratio stood at 11.67% as per Basel I and at 13.02% as per Basel II norms. When many banks are finding it difficult to meet the RBI-stipulated 70% provisioning coverage ratio (PCR), Punjab & Sind is very comfortable with its over 83% PCR.

Business per employee has also been rising, with H1FY11 business touching Rs. 10.5 crore per employee, due to employee rationing as well as steady growth in overall turnover. In H1 FY11, total income increased to Rs. 2,523 crore and net profit to Rs. 276 crore, resulting in first-half EPS of Rs. 15.10.

Although Return on assets (RoA) and net interest margin (NIM) at 0.98% and 3.00% respectively, annualised for the current year, are not very impressive compared to other public sector banks, its asset quality has not taken a beating. Gross NPAs are Rs. 331 crore (0.92% of gross advances) while net NPAs are Rs. 156 crore (0.44% of net advances), as of 30-09-10. The bank also has very limited exposure to commercial real estate and micro-finance sector, which provides relief, considering the upheaval these factors have caused on Dalal Street, lately.

At the upper price band of Rs. 120, fresh issue is being made at book value, which stood at Rs. 119.20 as of 30-09-10. Considering expected EPS of around Rs. 30 for FY11, the PE multiple works out to 4 times, again very attractive.  

A comparison with similar sized PSU banks is drawn below, which shows that the issue is attractively placed both with respect to PE and PBV multiple:

Empirical data suggests that PSU banks have rewarded, in the long-term. United Bank of India had made its IPO in February 2010 at Rs. 66 per share (at PE multiple of less than 4x and PBV multiple of 0.7x). Currently United Bank is trading at 106. Bank of Maharashtra had also made its IPO at similar PE and PBV multiples in February 2004, at Rs. 23 per share, which is now close to Rs. 63. Although the PE multiples have increased in case of this IPO, the prospects seem bright.   

Considering the attractive pricing, the issue is recommended for subscription even at upper band!