Q3 COMMENT. PNB: Core performance continues to be weak

Over the past couple of quarters, the focus of public sector banks has been more on containment of fresh slippages rather than on credit growth.

This, to a large extent, explains the market’s slight euphoria post Punjab National Bank’s December quarter results. Despite the bank recording a 9 per cent decline in core net interest income and no growth in its loan book, the market found comfort in the fact that the bank did not report any nasty surprises on the bad loans front.

After recording slippages of around ₹6,200 crore in the September quarter, PNB witnessed a lower ₹5,660 crore addition to bad loans in the December quarter.

This the third quarter when fresh slippages into bad loans have moved lower, after a sharp spike in the second-half of last fiscal.

Restructured loans, which have fallen sharply over the last two to three quarters, have continued to decline in the December quarter. But the troubles for the leading public sector bank are far from over. The existing large bad loan book could result in rise in provisioning in the coming quarters, despite moderating slippages. PNB’s gross non-performing assets are a steep 13.7 per cent of loans at about ₹55,600 crore.

To put these numbers in perspective, PNB’s bad loan book is now nearly half that of the total loan outstanding of mid-sized private sector banks such as IndusInd and YES Bank.

PNB’s bad loans spiked in the December and March quarters of last fiscal, on account of the RBI’s asset quality review. PNB’s GNPA is currently among the highest in the system. The bank’s restructured loans as of December 2016 stood at around 4.2 per cent of loans.

This is a sharp fall from the 8.6 per cent levels seen in the same quarter last year. But this is only because much of the slippages into bad loans have been from restructured assets in the last two to three quarters.

While the management’s focus on bad loan recovery has been yielding results to some extent, it needs to be seen if the trend will continue. Cash recovery and upgradation of NPAs have been moving up in the last two to three quarters.

PNB’s core performance has been weak in the last couple of quarters. Muted credit growth on the back of the bank consciously de-leveraging its large accounts and reversal of income due to rise in bad loans have impacted the bank’s core net interest income. The latest December quarter was no different. The 306 per cent growth in net profit is nothing to cheer about, as it has been on a very low base of ₹51 crore profit in the same quarter last year.

The bank’s weak return ratios are a better indication of its dismal core performance. PNB’s return on asset is just 0.12 per cent currently, far lower than the 1.6-2 per cent that private banks deliver.

Return on equity is a meagre 2.1 per cent. The bank’s operating profit in the December quarter stood at ₹3,155 crore, short of the ₹3,363 crore of bad loan provisioning for the quarter.

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