Stock Fundamentals

PNB’s fundamentals to worsen further. This is what investors should do

Radhika Merwin | Updated on June 28, 2020 Published on June 28, 2020

Merger pain may come to the fore in coming quarters

Weak core performance, a likely sharp deterioration in asset quality, poor return ratios, merger headwinds and a relatively high valuation, owing to the recent run-up in stock price, present a good case for investors to exit Punjab National Bank at this juncture.

Importantly, the bank’s already weak fundamentals are likely to come under further pressure in the coming quarters. The latest March quarter results carry telltale signs of the pain ahead for the State-owned bank.

In the March quarter, PNB’s asset quality optically improved — GNPA ratio at 14.2 per cent, down from 16.3 per cent in the December quarter — but it was mainly on account of asset classification standstill benefit on loans under moratorium and large write-offs. The management in its post-results concall stated that 30 per cent the bank’s loans were under moratorium as of May.

With the moratorium now extended to August 31, the real picture on loans under moratorium will emerge only in the June quarter. More critical, as in the case of other banks, will be the pace and amount of recoveries on such accounts when the moratorium is lifted in September.

An additional cause for worry for PNB is the low provision buffer it has to meet the incremental stress in the coming quarters. The bank has made a bare minimum provision of 5 per cent on loans under the standstill benefit (RBI has mandated 10 per cent provisions on such accounts over two quarters beginning March quarter).

The fact that the bank has not made any contingent provisions to deal with Covid-led stress can erode earnings in the coming quarters. As such, the bank, in its notes to accounts, has stated that provisions of ₹766 crore in respect of frauds have been deferred for adjustments in the coming quarters.

Lastly, the amalgamation of Oriental Bank of Commerce and United Bank of India with PNB, effective April 1, presents its own set of challenges. While the idea of merging a weak bank with two weaker banks was already worrisome right from the start, the merger could throw up a fresh set of challenges in the coming quarters given the widespread disruption in the economy amid the pandemic crisis. The management has stated that 21-22 per cent of loans are under moratorium for the combined entity, comprising agriculture, retail, MSME and corporate.

It will be important to watch how this figure pans out in the coming quarters. As of March 2020, the GNPA ratio of the combined entity stood at 13.79 per cent.

PNB’s weak core performance, a possible spike in bad loans, significant exposure to stressed sectors such as telecom and power and the merger overhang can keep earnings under notable pressure in the current fiscal.

The stock has rallied by over 35 per cent over the past month and now trades at 0.7 times its FY20 book value, which is higher than peers such as Bank of Baroda and Canara Bank that trade at about 0.4 times (SBI trades at 0.7 times book).

Erosion in earnings could see the stock of PNB correct significantly in the coming months.

Weak fundamentals

Even before the ₹14,000-odd crore Nirav Modi scam hit PNB in the beginning of 2018, the bank’s fundamentals were on weak ground.

In fact, PNB’s bad loan troubles began much before the RBI’s asset quality review in December 2015, owing to its exposure to stressed sectors such as power and iron and steel. The bank reported a huge loss of ₹12,282 crore in FY18 and a near-₹10,000-crore loss in FY19.

PNB clawed into the black in FY20, reporting a muted ₹336-crore profit, though it reported a notable loss of ₹697 crore in the latest March quarter.

Earnings could erode further in the coming quarters.

For one, with a huge bad loan book of about ₹ 73,000 crore (standalone), provisioning will continue to remain elevated; post-merger, the asset quality pain could accentuate. As such, slippages and recovery on loans under moratorium for the combined entity will be critical to note.

PNB also has significant exposure to the stressed telecom and power sectors and has seen its exposure to sensitive sectors such as commercial real estate and NBFCs go up notably in the past year. The exposure to stressed sectors at the combined entity level will be important to watch.

As mentioned earlier, the bank has not made any buffer by way of additional provisions to tackle Covid-related stress in the coming quarters. Large private banks such as HDFC Bank, ICICI Bank and Axis Bank have made additional Covid- related provisions to the tune of ₹1,500-3,000 crore.

PNB’s core performance has also been weak. In FY20, PNB’s domestic advances grew by a meagre 1 per cent (retail grew by a modest 6 per cent). Credit growth could languish in low single digits in the current fiscal (in the combined entity), keeping core earnings under pressure.

PNB’s return on assets and return on equity stood at 0.04 per cent and 0.59 per cent, respectively, in FY20.

Published on June 28, 2020
  1. Comments will be moderated by The Hindu Business Line editorial team.
  2. Comments that are abusive, personal, incendiary or irrelevant cannot be published.
  3. Please write complete sentences. Do not type comments in all capital letters, or in all lower case letters, or using abbreviated text. (example: u cannot substitute for you, d is not 'the', n is not 'and').
  4. We may remove hyperlinks within comments.
  5. Please use a genuine email ID and provide your name, to avoid rejection.