There appears to be no immediate relief in sight for public sector banks, which have lagged the banking index in the last one year. Punjab National Bank (PNB) is one such instance. The stock is already trading much below its book value because investors are wary of its loan quality. Yet its results on Friday offer little hope on this score.

Rising bad loans, high levels of restructured assets and elevated provisioning costs have trimmed profit growth for PNB. The bank has also been going slow on lending, instead focussing efforts on recovering doubtful loans. As a result PNB’s loan growth tapered down from a weak 5 per cent in 2012-13, to an even more anaemic 4 per cent in the quarter ended June 2013. This is also evidence that the bank’s retail push has not yielded results. During the quarter, retail loans grew by a modest 8 per cent.

The bank is in the process of repaying high-cost bulk deposits. The proportion of such deposits has fallen to 9 per cent from 22 per cent a year ago. While this did help reduce cost of funds, margins didn’t improve, as loans too yielded less.

Treasury gains were one bright spot in the numbers, trebling from last year, as PNB kept 41 per cent of its SLR investments in the marked-to-market portfolio. However, these gains are likely to evaporate with the steep correction in the bond prices this month.

Outlook

Looking ahead, these losses, combined with loan quality concerns will weigh on the stock. PNB’s exposures to stressed sectors such as infrastructure, metals and commercial real estate remain high. Gross non-performing assets increased to 4.8 per cent of loans this quarter from 4.3 per cent in the previous quarter. Restructured loans, one of the highest within the public sector banks, loomed at 10.9 per cent. As loan growth moderates, a recovery in the asset quality will be the key factor to watch, for PNB investors.

Related Topics
comment COMMENT NOW