Regaining Street’s confidence may not be easy for PNB

Though Q3 numbers showed improvement in asset quality, the bank lags its peers

The December quarter (Q3) was a mixed bag for Punjab National Bank (PNB). The good part for the scam-hit public sector bank is that the impact of last year’s Nirav Modi fraud is captured. Therefore, fresh pain from this incident is unlikely. PNB returning to profit (~246 crore), after three quarters of losses, in Q3 and some improvement in headline asset quality numbers are positive takeaways. The government recently stating that it won’t consider further consolidation of public sector banks (PSBs) also means relief to investors.

Yet, the journey to regain the Street’s confidence may be tough. The PNB stock hasn't moved much since the results, down 1.2 per cent in line with the Sensex.

On the positive side, PNB’s absolute provisioning (for bad loans) reduced by 38 per cent year-on-year and 72 per cent sequentially to ~2,754 crore, which is the lowest in recent quarters. Second, slippages or fresh accretion of bad loans was contained at ~3,900 crore in Q3 -- also a multi-quarter low. Consequently, the slippages to loan book ratio declined to 3.5 per cent as against 5.5 per cent in Q2.

Yet, Q3 numbers suggest that core operations aren’t too strong. Net interest income (NII) grew by just 8 per cent year-on-year, hurting profitability or net interest margin (NIM), which shrunk by 30 basis points (bps) to 2.4 per cent. PNB is, in fact, the only PSB to witness a decline in its loan book by 4 per cent in Q3.

Gross and net non-performing assets (NPA) reduced sequentially to 16.3 per cent and 8.2 per cent, respectively, in Q3, down 70–90 bps, but they were still the highest among top PSBs. In fact, with the net NPA ratio of PNB being more than that of Bank of India or BoI (5.87 per cent in Q3), analysts feel the March quarter will be crucial. If BoI demonstrates growth and contains its NPAs reasonably, analysts say it may take an edge over PNB, given its exit from the Prompt Corrective Action (PCA) framework. Besides, Siddharth Purohit of SMC Capital points out that with Tier-1 capital back at sub-7 per cent level, PNB may need capital infusion by the government for growth. “Much of capital infused so far has been consumed to write off loans,” he adds.

With these challenges, benign valuation of 0.7x FY20 book alone may not help PNB stock win back investors’ confidence.