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PNB Q2: Modest profit is thanks to deferment of provisions

Radhika Merwin BL Research Bureau | Updated on November 05, 2019

Large bad loan book of PNB, deferment of provisions in respect of frauds and pending DTA write-down post adoption of new corporate tax rate, can impact earnings substantially in the coming quarters

Punjab National Bank, which has reported a rise in bad loans, elevated provisioning and weak core performance in the latest September quarter, could have been passed off as yet another bank, among many others, witnessing a rough quarter.

But the fact that PNB is the anchor bank in the proposed merger with OBC and United Bank, raises grave concerns over its persisting weak finances and its ability to shoulder the impeding merger with weaker banks.

Aside from the headline numbers on bad loans, loan loss provisions and core net interest income, that paint a dismal picture, it is the looming pressure on earnings that needs more attention.

Also read: Q2 results -PNB clocks Rs 507 crore net profit

In the latest September quarter, PNB’s bad loan book went up to Rs 79,458 crore from Rs 77,267 crore in the previous June quarter. While provisions on bad loans also moved up sequentially (51 per cent) impacting earnings, the performance would have been much worse had the bank not deferred provisions in respect of frauds and adoption of the new corporate tax rate regime. About Rs 2284 crore of provisions for certain frauds has been carried forward to the coming quarters; the staggering impact of this will weigh on earnings. Importantly, the bank has not moved to the new corporate tax rate regime. When it does, the adjustment (write-down) on its deferred tax asset (DTA) can be substantial, leading to sharp one-time impact on profit.

PNB that reported a marginal profit of Rs 507 crore in the September quarter, could well have slipped into the red, had some of these provisions and write-downs been taken into account during the quarter.

Read more: In its new avatar, PNB to focus on digital transformation

Weak links

PNB’s fundamentals had been shaky even before the Nirav Modi scam hit the bank in the beginning of 2018. The bank’s GNPA ratio moved up sharply from 6.5 per cent levels in FY15 to 15.5 per cent in FY19. In the latest September 2019 quarter, GNPAs have inched up further to 16.7 per cent (16.5 per cent in June quarter). The large bad loan book will continue to entail heavy provisioning. Provisioning for bad loans went up to Rs 3253 crore in the September quarter, from Rs 2147 crore in the June quarter.

After reporting a steep Rs 12,282 crore of loss in FY18 and a near Rs 10,000 crore loss in FY19, PNB has clawed back into the black in the first half of the current fiscal. But the profits are modest and can erode in the coming quarters.

For one, with a huge bad loan book of about Rs 79,000 crore, provisioning will continue to remain elevated, even if slippages moderate. Two, the bank has made use of dispensation for deferment of provisions in respect of frauds. Already the bank had an unamortised amount of Rs 718 crore, under this head, upto June quarter, which was to be carried forward in the coming quarters, including the September quarter. The bank in the latest September quarter has declared additional provisions of Rs 2580 crore in respect of frauds; a part of this has been charged to P&L during the quarter, while the rest has been carried forward to the coming quarters. A total of Rs 2284 crore of provisions thus deferred, will impact earnings in the coming quarters.

Also, following the adoption of change in corporate tax rate, the bank will have to re-measure the balance of net DTA, which could result in a sharp write-off. This when implemented could take a toll on the profit. While this will be a one-time impact, it could erode earnings during the particular quarter, weakening the capital ratio.

Capital conundrum

PNB had a weak CET1 capital ratio of 6.35 per cent in the June quarter. This went up notably to 10.9 per cent in the latest September quarter, due to two rounds of capital infusion by the Centre in the month of September, amounting to Rs 16,000 crore.

The infusion is part of the Centre proposed merger plan---which seeks to infuse about Rs 16,000 crore into the combined entity of PNB, OBC and United Bank.  Given the weak state of affairs at OBC (GNPA at 12.5 per cent) and United Bank (GNPA at 15.5 per cent), it needs to be seen if the capital infused so far would be sufficient.

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Published on November 05, 2019

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