Stock Fundamentals

Punjab National Bank: Under pressure

Radhika Merwin | Updated on March 09, 2018 Published on December 23, 2017

Earnings will continue to be stressed because of high provisioning and modest credit offtake

With the year coming to an end, it’s time to dig into one’s portfolio and assess which stocks to hold on to and which to exit. Public sector banks, in particular, that have run up sharply post the Centre’s mega recapitalisation plan of ₹2.1 lakh crore, need a review.

Given that many of these banks are yet to show a convincing recovery in financial performance and their earnings are likely to remain under pressure over several quarters, investors sitting on hefty gains can take profits off the table.

The stock of Punjab National Bank (PNB) has gained over 40 per cent in the past year, with much of its rally triggered by the Centre’s recap announcement. The bank’s fundamentals, however, continue to lag market expectations. A large stressed asset book, incremental provisioning requirement and weak balance sheet remain key overhangs for the bank’s earnings over the next couple of quarters.

Provisioning requirements

With markets perched precariously, investors sitting on tidy gains should consider exiting the stock and re-enter later when there is better earnings visibility. PNB’s gross non-performing assets (GNPAs) are still a steep 13.3 per cent of loans at about ₹57,630 crore.

Including restructured advances, its stressed assets are 15.7 per cent of loans. A large stressed loan book will likely keep provisioning requirements high over the next couple of quarters. In particular, provisioning requirement on resolution of large accounts under the National Company Law Tribunal (NCLT) will continue to eat into the bank’s profitability, which is already depressed — return on assets (ROA) was around 0.24 per cent and return on equity (ROE) at 4.5 per cent as of September 2017.

Capital infusion

While capital infusion by the Centre will help alleviate balance sheet stress, elevated bad loan provisioning, slow recovery in profitability and still modest credit offtake are negatives for the stock.

The likelihood of a merger with smaller PSU banks, also remains a main cause for worry for larger banks such as PNB and Bank of Baroda.

Added to this is the concern that, in the past, capital infusion at an abysmal price (below book price) has led to dilution in book value. PNB’s core banking business trades at about 0.8 times its one-year forward book.

On an adjusted basis (adjusting the book value for the entire bad loans and 30 per cent of restructured assets) PNB trades at about 1.4-1.5 times which, given the risk to earnings, is not cheap.

The bank’s non-core businesses — PNB Gilts, Principal PNB Asset Management, PNB Housing Finance, PNB MetLife India Insurance — together add about ₹47 a share to PNB’s core value.

Monetising some of these non-core investments can unlock value. Nonetheless, weak performance in the core business will continue to weigh on the stock in the medium term.

PNB’s asset quality worries began much before the RBI’s asset quality review that led to a sharp rise in bad loans for most public sector banks in FY16. Owing to the bank’s exposure to stressed sectors such as power and iron and steel, asset quality has been under pressure over the past couple of years.

Stressed books

GNPAs moved up sharply from 6.5 per cent levels in FY15 to 12.9 per cent in FY16 and 12.5 per cent in FY17. Currently at over 13.3 per cent of loans (as of September 2017), the large bad loans remain a cause for worry, as they could entail continued heavy provisioning. While slippages nearly halved from ₹6,018 crore in the June quarter to ₹3,517 crore in the recent September quarter, slippages are still high.


Write-offs also went up notably in the September quarter, against the June quarter. Write-offs stood at ₹9,200 crore in FY17 versus ₹6,485 crore in FY16. In the half year ended September 2017, the write-off figure was ₹3,778 crore. In a write-off, banks stop recording the bad loans in the books and take a hit on their profits by fully providing for such loans. Persistently high write-off levels can continue to drag earnings.

The bank’s net NPAs are nearly 80 per cent of its net worth. This limits the ability to improve provision coverage ratio substantially. The Centre’s capital infusion, however, can help the bank deal with its stressed assets better. PNB’s core performance remains weak.

Net interest income grew by a muted 3.5 per cent in the September quarter on the back of 4.5 per cent growth in overall loans (domestic growth at 8.3 per cent).

Muted profit growth

Modest fee income growth and a significant uptick in provisioning saw net profit grow just 2 per cent y-o-y, in the September quarter.

While the Centre’s infusion of capital into the bank should aid credit growth, the recovery will be gradual.

Over the past three years — between FY14 and FY17 — the bank’s advances have grown by a meagre 6 per cent annually.

Earnings have shrunk annually by about 26 per cent (annually) between FY14 and FY17, with the bank reporting a steep loss of about ₹4,000 crore loss in FY16.

Earnings will continue to remain under pressure, on account of high provisioning. Over the next year, pace of improvement in asset quality, resolution of cases under NCLT and likelihood of a merger with a weaker bank will be key factors to watch out for.

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Published on December 23, 2017
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