Punjab National Bank : Net profit rises, but weak net interest income weighs on earnings

BL Research Bureau

At first glance, Punjab National Bank’s lower bad loans (sequentially and year-on-year) and sharp fall in provisioning in the June quarter, resulting in net profit of Rs 1018 crore (loss of Rs 4749 crore in the March quarter and loss of Rs 940 crore in the same quarter last year), appear comforting. But a notable fall of near 12 per cent in the bank’s core net interest income, weak capital ratio and deferment of provisions on certain frauds, indicate earnings pressure for the bank. As such, bad loans have fallen only marginally in the June quarter, and the huge bad loan book of around Rs 77,000 crore, remains a concern. In fact, GNPA as a ratio of loans has inched up to 16.5 per cent in the June quarter from 15.5 per cent in the March quarter, implying decline in loan book.

Sharp slippages and rise in provisioning can impact earnings and eat into capital in the coming quarters, in turn taking a toll on an already muted loan growth.

Still large NPA

For PNB, that has been riddled with challenges, since the break-out of the Nirav Modi scam, there is still some more pain expected in the coming quarters.

While on the provisioning front, there has been a notable easing—bad loan provisions have fallen to Rs 2147 crore in the latest June quarter, from Rs 9153 crore in the March quarter and Rs 4981 crore in the same quarter last year—there is possibility of a rise in the coming quarters, owing to several reasons.

One, with a huge bad loan book of about Rs 77,000 crore, provisioning will continue to remain elevated, even if slippages moderate. Detailed information recoveries and write-offs is awaited and will be important to understand the sustainability of the fall in NPAs.

Two, the bank has made use dispensation for deferment of provisions in respect of frauds amounting to Rs 425 crore---recognizing a part in the June quarter, and has deferred Rs 319 crore to subsequent quarters. Another unamortised amount pertaining to FY19 of Rs 415 crore has also been deferred to the ensuing quarters.

The bank has also reported one loan account in the power and steel sector (Bhushan Power and Steel) as fraud to the RBI, involving an amount of Rs 3760 crore (outstanding as on June 30, 2019). The account is already an NPA, and the bank has a provision of Rs 1880 crore, with respect to the account. The account is near resolution under IBC and the bank has stated that the remaining provision in the fraud account will be done by it subsequently, according to the RBI guidelines.

Overhang of these frauds could continue to weigh on the earnings of the bank.

As such, PNB’s core performance is muted. Weak core profitability makes the bank vulnerable to sharp slippages and rise in provisioning in the coming quarters.