Money & Banking

PNB and Union Bank of India seek to set off accumulated losses

K Ram Kumar Mumbai | Updated on July 16, 2020 Published on July 14, 2020

Union Bank of India and Punjab National Bank (PNB) are seeking to set off their accumulated losses amounting to ₹32,758 crore and ₹28,708 crore, respectively, following the recent amalgamation of two public sector banks (PSBs) each with them.

These banks are planning to do this by utilising the balance standing to the credit of their Share Premium Account in order to present a true and fair view of their financial position.

If shareholders approve the setting off of the accumulated losses of Union Bank of India (including erstwhile Andhra Bank and Corporation Bank) and PNB (including erstwhile Oriental Bank of Commerce and United Bank of India) as of March-end 2020, the balance in their Share Premium Account will, accordingly, stand reduced to ₹17,348 crore and ₹40,762 crore, respectively, during the FY21.

Following the amalgamation of Oriental Bank of Commerce and United Bank of India with it with effect from April 1, PNB is now the country’s second largest public sector bank (PSB).

Following the amalgamation of Andhra Bank and Corporation Bank with it with effect from April 1, Union Bank of India is now the country’s fifth largest PSB.

Practicing Chartered Accountant S Ravi observed that by seeking to utilise the amount standing in their Share Premium Account to set off the accumulated losses, PNB and Union Bank of India may be trying to put their best foot forward, starting the post-amalgamation journey with a relatively clean balance-sheet.

“Since the government has capitalised public sector banks well, this (setting off of the accumulated losses) will not be an issue at all.”

Impact

However, Ravi felt that this can impact the ability of banks to buy-back shares or pay dividend to shareholders.

Analysts say the capital adequacy ratio (CAR) of banks will decline due to the setting-off of the accumulated losses at one go.

Besides common shares, statutory reserves, and capital reserves, among others, share premium is one of the important components of Common Equity Tier 1 Capital.

PNB has already announced that it intends to raise equity capital up to ₹7,000 crore in order to meet the capital requirement in terms of the Reserve Bank of India’s Basel III Capital Regulations, and also to fund the general business needs. Union Bank has not yet disclosed its capital raising plans.

As per Union Bank of India’s annual report: “The proposed set off will present the true and fair view of the financial position of the bank, and will not affect any ratios such as book value per share, Return on Equity (ROE), Earning per share (EPS).

“...The proposal will also put the Bank in a better position to achieve its turnaround plans in a time-bound manner.”

It may be pertinent to mention here that in 2018, Indian Overseas Bank (IOB) had utilised ₹6,979 crores out of ₹7,650 crore standing to the credit of its Share Premium Account to set off the accumulated losses (₹6,979 crores) as at March 31, 2017.

Therefore, IOB’s Share Premium Account and accumulated losses had reduced accordingly.

Meanwhile, Bank of Maharashtra (BoM), too, is planning to set-off the accumulated losses as of March-end 2020 against the balance available in its share premium and special reserves accounts, subject to necessary approvals/ permissions. The latest position on the bank’s accumulated losses could not be ascertained.

The bank is also planning to raise ₹2,000 crore via equity capital and ₹1,000 crore by way of issue of Basel III-compliant Tier I/II bonds or such other securities.

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Published on July 14, 2020
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