Q3 COMMENT. The worst is not yet over for the third largest PSB

Large state-owned banks such as Punjab National Bank have been going downhill over the last two to three years. The stock price has nearly halved in the past year, owing to sharp deterioration in asset quality. The latest December quarter results only paint a more dismal picture.

The stressed assets — bad loans and restructured loans — of PNB stood at about 17 per cent of total loans in December 2015. Given that PNB is the third largest public sector bank (by assets), such a high level of stressed loans is a cause for concern. Weak core performance and spike in bad loan provisioning (more than doubling from last year) has resulted in the net profit for the December quarter plunging by over 90 per cent over the same quarter last year. But for the tax write-back of about ₹900 crore, the bank would have recorded substantial losses for the quarter.

Going by the results, the bank is likely to face more pain in the coming quarters. For one, the bank’s bad loans as a per cent of total loans have moved up significantly. At 8.5 per cent of loans, gross non-performing assets (GNPAs) ratio is among the highest in the system.

Of the incremental slippages during the quarter, over ₹5,000 crore has been due to the RBI’s asset quality review that has forced banks to recognise certain loans as NPAs even if they are not defaulting on payment. The management has indicated a similar amount that can be recognised in the March quarter as well.

Two, the bank’s restructured loans as of December 2015 are high at about 9 per cent. Increased slippages from these accounts into bad loans are a looming concern. In the December quarter, about ₹2,200 crore of restructured loans slipped into the NPA category.

Moreover, the bank has about ₹6,800 crore worth loans restructured under the 5:25 scheme and a similar amount under Strategic Debt Restructuring.

These loans carry far lower provisioning than that mandated for bad loans. This throws open the possibility of sharp increase in provisioning in future.

PNB’s core performance has also been weak.

The bank’s core net interest income fell by 2.7 per cent during the December quarter, compared to the same quarter last year. This was due to muted loan growth and fall in net interest margin (NIM).

The bank’s domestic loan book grew about 8 per cent over last year. The bank’s NIM fell by about 50 basis points to 2.7 per cent, over the same period last year.

PNB’s return on asset has slipped to an abysmal 0.3 per cent for the nine months this fiscal. This is among the lowest within the PSB space and far lower than the 1.6-2 per cent that private banks deliver.

Given the bank’s high leverage of about 15 times (ratio of asset and net worth), the meagre return on equity of about 4.5 per cent does not justify the risk.

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