Homebuyers Lure PNB With Margin at 4-Year Low: Corporate India

Punjab National Bank, India’s third-largest state-run lender, is seeking home and automobile buyers to boost credit and bolster margins from the narrowest level in almost four years.

The bank also plans to limit high-cost deposits of more than 10 million rupees ($183,000) and reduce credit to indebted real estate developers, said K.R. Kamath, chairman and managing director of the New Delhi-based bank. Net interest margin, the difference between earnings on loans and the cost of funding, fell to 3.47 percent in the three months ended Dec. 31, the least since the three months to March 2009. Kotak Mahindra Bank Ltd. had the highest margin of 4.6 percent last quarter.

The lender, which has the second-largest branch network in the world’s most populated nation after China, is tapping segments that expanded faster than loans to companies. The slowest pace of growth in a decade in the $1.8 trillion economy has sapped demand for credit to expand and build factories. Mortgages may climb as the central bank reduces borrowing costs, encouraging homebuyers to accelerate purchases.

“We will be back on the growth path from the next financial year if the economy permits,” Kamath said in an interview. “We have realigned our balance sheet and have put in place measures to recover bad loans.”

Demand for loans to buy homes and vehicles accelerated to 14.3 percent at Indian banks in the 12 months to Dec. 28, while the pace of growth for credit to industry slowed to 13.8 percent, according to data compiled by the central bank.

Bank of Baroda

Retail lending, including mortgages and auto credit, account for as much as 11 percent of Punjab National’s loans, exchange filings show. Punjab National was overtaken by Bank of Baroda as India’s second-largest lender by assets in the three months ended Sept. 30.

“Home sales will pick up in the current year with a reduction in interest rates,” said Anubhav Gupta, a Mumbai-based analyst at Kim Eng Securities Pvt. “While bookings at new projects were low last year, transactions in the secondary market remained strong, primarily driven by smaller cities.”

The central bank cut its policy rate to 7.75 percent from 8 percent on Jan. 29, the first reduction since April. Six of 15 economists in a Bloomberg survey forecast the Reserve Bank of India will reduce the benchmark rate by three-fourths of a percent by December.

Property Sales

Property sales in Bangalore, home to software developers including Infosys Ltd. and Wipro Ltd., grew 77 percent in the two years to Dec. 31, according to Liases Foras Real Estate Rating & Research Pvt. In New Delhi, a record 30.99 million square feet of property were sold in the three months to March 31, before dropping to 20.5 million square feet by December, the data show.

The 117-year-old lender is targeting a net interest margin of more than 3.5 percent, Kamath said. The company also plans to cut bad loans, which narrowed for the first time in 15 quarters in the third quarter, to boost profit, he said. Net income may rise 2 percent in the year ending March 31, according to the median estimate of 59 analysts. That’s the slowest pace of annual growth since at least 2002.

At about 12 percent, Punjab National has the highest proportion of soured and restructured debt among the nation’s 10 largest lenders, according to exchange filings. The measure is 7.7 percent for State Bank of India, the nation’s largest, and 2.1 percent for No. 2 ICICI Bank Ltd.

‘Stressed Assets’

“With stressed assets higher than 12 percent of the loan book, it will take time to clean up the balance sheet,” Vishal Narnolia, a Mumbai-based banking analyst at SMC Global Securities Ltd., said by phone. “It will take at least two more quarters before seeing any meaningful improvement.”

The lender to grounded carrier Kingfisher Airlines Ltd. and Suzlon Energy Ltd., the wind-turbine maker that defaulted on its convertible bonds last year, ordered three executive directors to monitor recovery of delinquent debt over 5 million rupees, Kamath said.

Shares of the lender have dropped 13 percent in the past year, making them the worst-performing stock after IDBI Bank Ltd. in the 14-company S&P BSE Bankex index. They rose 0.5 percent to 814.65 rupees in Mumbai, the highest since Feb. 27.

“PNB is poised for a rally as the economy improves,” said Nitin Kumar, an analyst with Quant Broking Pvt. “The pace of increase in non-performing assets has moderated and growth in the economy will help them to bring down stressed assets substantially.”

‘Extraordinary Support’

India Ratings & Research Pvt., a unit of Fitch Ratings, yesterday kept Punjab National’s local currency rating at AAA, citing “extraordinary support” from the government, which owns 56 percent of the lender. Finance Minister Palaniappan Chidambaram, in his budget presented in Parliament on Feb. 28, pledged to add 140 billion rupees ($2.6 billion) to boost capital at state-run banks.

He also announced measures to accelerate infrastructure projects, which will help in recovering bad loans in the road and power sectors, said SMC’s Narnolia. Chidambaram allocated 330 billion rupees for the ruling coalition’s flagship rural jobs program and 100 billion rupees for a plan to give the poor cheap food grains, ahead of a general election due by 2014.

“There is an expectation that credit offtake will pick up over the next two quarters as higher government spending nudges private investments,” said Debasish Mallick, chief executive officer at IDBI Asset Management Ltd. That may help banks, he said.