Money & Banking

PNB: Exposure to stressed sectors continues to dent earnings

Radhika Merwin BL Research Bureau | Updated on November 23, 2017 Published on November 08, 2013


After a good round of performance by private banks, and pleasant surprises from the likes of Bank of Baroda and Bank of India, the September quarter results of Punjab National Bank (PNB) came as a shock.

Deteriorating asset quality and elevated provisioning costs affected the bank’s earnings growth. The stock that had taken a hit on its valuations since the beginning of this year, now trades at 0.4 times its one-year forward book value. However, this valuation does not reveal the complete picture.

Net non-performing assets at 3.1 per cent of loans as of the September quarter are 40 basis points higher than the previous quarter.

The restructured book, which was already one of the highest within the sector, has now burgeoned to 11.5 per cent of loans.

After adjusting the book value for the entire net NPAs and a possible slippage of 30 per cent on restructured loans, the stock is trading close to its adjusted book value.

The return on equity for the third largest public sector bank by asset size is now one of the lowest at 6 per cent .

With a leverage (ratio of assets to net worth) of 14 per cent, the abysmally low ROE is a far cry from most large private sector banks that have ROEs of 18-20 per cent and leverage of 9-12 times.

The bank’s loan growth, which had tapered to 5 per cent in 2012-13, continued to remain muted at 6 per cent in the September quarter.

Though PNB’s retail loan book grew 15 per cent, it has not helped much as its share is only 12 per cent of total loans.

A chunk of PNB’s loans is given to the large- and mid-corporate segments, and its exposure to stressed sectors continues to remain high.

In fact, the growth in loan book during the quarter was led by stressed sectors such as power (23 per cent growth) and iron and steel (26 per cent). Of the total restructured assets during the quarter, 53 per cent was in the infrastructure space. On the deposits front, the bank is in the process of reducing its high-cost bulk deposits. While this aided in bringing down the cost of funds the benefit has been negated due to lower yield on loans.

This has kept the net interest margins under pressure. With the management indicating some tweaking of lending rates (down) to grow its loan book, margins will continue to remain under pressure.

A significant recovery in asset quality is required before the stock can be re-rated.

Published on November 08, 2013
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