Shares of state-owned Punjab National Bank (PNB) surged more than 7 percent, hitting a 52-week high after the lender received the government’s approval (when?) to sell its stake in UTI Asset Management Company Ltd, India’s oldest fund house.
This paves the way for PNB to exit one of its non-core businesses. The bank’s share price hit a 52-week high on Friday.
At November 25 market price, its 15 percent stake will be worth about Rs 1,376 crore.
PNB has expressed its desire to exit non-core businesses such as mutual funds and insurance and pocket investment gains as much as possible.
Given that PNB’s stake is quite large, it is unlikely for the lender to offload it entirely at one go.
The bank had sold 3 percent of its stake in October 2020, when UTI AMC offered its shares to the public. At that time, the fund house’s financial performance didn’t impress the market and PNB could gain only about Rs 180 crore.
“The mutual fund’s valuation has improved since its listing two years ago. There are significant gains to be made and the bank needs funds to grow its book,” said an analyst requesting anonymity.
Will the fund house deliver?
UTI AMC’s performance has been subdued in Q2FY23, with net profit coming in flat from a year ago.
That said, the fund house saw its assets under management (AUM) grow at a healthy 11 percent on a quarterly average basis. Analysts note that the growth levers justify current valuations. In fact, the fund house’s shares trade at a deep discount to other big listed peers.
At roughly 13 times its estimated earnings per share for FY24, the fund house is a bargain hunt, according to analysts. Its shares have been under pressure for the past three months but UTI AMC is hardly an outlier as most listed AMCs have witnessed selling pressure.
For PNB, however, there will be considerable gains, given its low acquisition cost of the AMC business. An urgency in stake sale is warranted, both from the view of monetising gains and the need to raise growth capital.
Focus on retail, small business loans
The stake sale is important for PNB as is the plan to exit other businesses, if the bank wants to participate in the credit growth surge of recent times. The bank reported 15 percent credit growth for the July-September quarter of FY23, similar to some of its peers but fell short compared with State Bank of India’s 20 percent and several private-sector lenders.
The bank’s management has expressed the desire to lift its business growth significantly and to focus on retail and small business loans more than corporate loans.
“Our focus is on the RAM (retail, agriculture and MSME) side. We want to increase the RAM portfolio because the yield is much better as compared to the corporate book,” Atul Kumar Goel, managing director and chief executive officer, had told analysts at a post earnings call (when?). Goel is confident about a 12-13 percent credit growth for the current year.
To fund this, PNB needs capital. Its capital adequacy ratio is 14.7 percent, as of September, slightly higher than the regulatory minimum of 11.5 percent. The bank has plans to raise money through bonds but the UTI stake sale will go a long way in boosting capital.
Moreover, PNB's internal accruals are limited as the bank's quarterly profits have gone into filling its bad-loan hole. The odds of getting capital from the government are low as the Centre has made clear its reluctance in giving money to PSBs. In fact, the government didn't allocate funds towards bank recapitalisation in the Union Budget this year.
Many shades of trouble
Beefing up its capital may go a long way for investors to view PNB favourably but the lender needs to fix its asset quality as well. Analysts point out that PNB has fallen short of peers when it comes to improvement in asset quality. For the July-September quarter of FY23, the bank reported a net profit of Rs 410 crore. This was lower than Street estimates.
Provisions continued to eat into operating profit even though this tide seems to have changed for every other bank. Debilitating frauds, weak recoveries and persistent stress have kept a shadow over PNB’s performance.
The exuberance surrounding PSBs and news of this stake sale, however, are not winning PNB a rerating from analysts yet.
Seven brokerages still have a ‘sell’ rating on the stock while six have a ‘hold’ tag. Only five have a ‘buy’ tag on it. The pessimism stems from the bank’s chequered record on key operating metrics.
More than 80 percent of PNB's operating profits has gone towards provisioning in the past two years even as the bad loan cycle has turned for most other banks.What ails PNB is its history of poor credit underwriting and the merger of Oriental Bank of Commerce and United Bank with itself. Equally, weak balance sheets also added to the trouble. Analysts view the balance sheet of PNB with skepticism even today. Those at Jefferies do not see operating profit growth of more than 10 percent in the next two years as well.