PNB & BoB: Branch expansion to help banks grow bottom line

The third quarter reaffirms that Punjab National Bank (PNB) and Bank of Baroda (BoB) are the two most stable public sector banks in the country. Despite a mere 11% credit offtake growth, both PNB and BOB managed to grow their loan books at 20.3% and 23.5%, respectively in December ’09 quarter from year-ago levels.

This is the fastest pace among large banks. Both the banks are likely to continue to grow their loan books faster than their peers.

Both the banks concentrated their efforts on retiring high-cost bulk deposits in the December ’09 quarter. And simultaneously, they increased the mobilisation of low-cost current account and savings account deposit (CASA). This resulted into higher net interest margin (NIM).

PNB and BOB posted an improvement of 20 bps and 51 bps, respectively, in their NIM in the December ‘09 quarter. While most of their peers continue to struggle to reach a mark of 3%, PNB & BOB have posted NIM in excess of 3%.
The banks reported an addition to gross non-performing assets (NPAs) during the quarter.

While PNB added Rs 537 crore of gross NPAs during the quarter, BOB added around Rs 304 crore of gross NPAs. A significant part of this rise was due to non-payment of agriculture advances, more like a one-time phenomenon. However, a provision coverage ratio of around 80% gives some solace to investors.

At this level, these banks have one of the highest provision coverage against bad assets in the industry. This is even higher than 70% advised by the Reserve Bank of India (RBI) earlier in the year.

Though the absence of trading gains slowed the net profit growth, it is expected to resume in the following quarters, given the increased focus on branch expansion.

For instance, BOB indicated that it expects to open 300 more branches in FY11. Similarly, at just under 5,000 branches, PNB has one of the largest-branch networks in the country. Such a large branch network will add more stability to the business model of these banks by bringing down the cost of funds even further and helping them grow their bottomline.