Q4 COMMENT. Another dismal quarter for PNB as bad loans pile up

It was yet another dismal quarter for State-owned Punjab National Bank, which saw no respite from rising bad loans in the last two to three years.

The March quarter results only highlighted that the worst is not yet over for the bank. The bank’s stressed assets— bad loans and restructured loans — stood at 17.5 per cent as of March. Weak core performance and spike in bad loan provisioning (trebling from last year and the previous quarter) have led to the bank reporting a loss of ₹5,367 crore for the quarter, against a profit of ₹307 crore for the same quarter last year.

PNB’s performance slipped across parameters. For one, the bank’s bad loans, as a per cent of total loans, have moved up significantly in the pecking order of PSBs. At 12.9 per cent of loans, the gross non-performing assets (GNPAs) ratio is among the highest in the system. Of the banks that have declared results, only UCO Bank (15.4 per cent) and United Bank (13.2 per cent) have GNPAs higher than that of PNB.

The bank’s restructured loans as of March 2016 fell to 4.6 per cent of loans, from about 9 per cent in the December quarter. But this was because a majority of the slippages into bad loans were from restructured assets. The management has also indicated that it has about ₹11,000 crore of loans under the SMA-2 category. The bank also has sizeable loans restructured under the 5:25 scheme and a similar amount under Strategic Debt Restructuring, that carry far lower provisioning than that mandated for bad loans. This throws open the possibility of a sharp increase in provisioning in the future.

Core performance PNB’s core performance has also been anaemic. The bank’s core net interest income fell 27 per cent during the 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 11.7 per cent over last year. While the high-yielding retail loan book fared better growing 19 per cent, it constitutes only 13 per cent of total loans, and has not helped margins. The bank’s NIM has fallen about 50 basis points to 2.6 per cent in FY16.

PNB’s return on assets slipped into the negative in fiscal 2016. 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 17 times (ratio of assets to net worth), the negative return on equity hardly justifies the risk.

Stock trade With the steep correction in the stock price, the valuation of the bank too has fallen sharply over the last two years. From about 1.2 times one-year forward book value during the 2014 rally, the stock has re-rated to about 0.5 times now.

COMMENT NOW