Investors with a more than a one-year horizon can consider adding the Punjab National Bank (PNB) stock to their portfolio. Trading at a modest valuation, PNB appears well-placed to sustain business growth that is superior to peers, given that its lending rates are among the lowest in the sector.

Apart from being comfortably capitalised (capital adequacy ratio at 14.5 per cent), PNB boasts of strong profitability ratios. A high proportion of low-cost deposits enables it to sustain higher-than-industry margins (at 3.4 per cent) despite competitive lending rates.

At the current market price of Rs 705, the stock is trading at 6.5 times its trailing one year earnings and 1.6 times its adjusted June 2009 book values).

PNB managed to expand its loan book at a strong pace in recent quarters, with aggressive rate cuts improving its credit-deposit ratio to 72.1 per cent in June 2009.

The bank also increased its market share in advances from 4.7 per cent to 5.4 per cent over the last one year.

Operating profits expanded by 24 per cent in the first quarter of 2009-10, excluding treasury gains. The bank’s investment book has seen a fall in its modified duration, suggesting that it may be able to limit any treasury losses from rising interest rates.

Though a rise in net Non Performing Assets to 0.19 per cent in the June quarter is a concern, the bank is shielded by high provision coverage of 90 per cent.

The restructuring of advanceswhich are to the tune of 5 per cent of total advances is, however, on the higher side. PNB is comfortably placed on capital adequacy, having taken advantage of surplus liquidity to raise Rs 1,000 crore this quarter.

It still has sufficient head room to raise capital through instruments such as perpetual bonds and preference shares towards Tier-1 capital and Tier-2 debt, as it has high core equity and reserves.

Rising interest rates do pose a risk to margins and earnings of all banks. However, the impact of a rising interest rate cycle on bank earnings (particularly treasury profits) may be limited this time round as the investment-deposit ratio has moderated.

The sizeable portion of investments in the Held-to-Maturity segment would also limit PNB’s vulnerability to rising yields.

S:BL