Q1: Wounded by fraud, PNB doesn’t have an easy road ahead

Mint Asia ST - - Mark To Market -


eight quar­ters ago, the man­age­ment of Pun­jab Na­tional Bank (PNB) put forth be­fore in­vestors an ac­count of their stren­u­ous ef­forts to man­age bad loans. They said there now ex­ists a “war room” for this.

Fast for­ward to the June quar­ter re­sults, the war room hasn’t re­ally done its job. The se­cond largest pub­lic sec­tor lender re­ported a 43.6% in­crease in its stock of bad loans for the June quar­ter as ₹ 7,363 crore slipped into the bad loans cat­e­gory. It had to write off loans worth ₹ 2,648 crore as these be­came toxic to the point of no re­turn. The gross bad loan ra­tio stands at 18.36%, and the lender has the in­sur­ance of pro­vi­sion­ing cover for only 62% of its loans.

Granted, the bank got pum­melled by a mas­sive fraud per­pe­trated by jew­eller Ni­rav Modi, for which it has had to spread its pro­vi­sion­ing over four quar­ters or risk sink­ing into obliv­ion due to the cap­i­tal ero­sion. PNB has pro­vided 63% to­wards the fraud as of June and has to make pro­vi­sions for the bal­ance amount in com­ing quar­ters.

Con­sid­er­ing fresh slip­pages are still el­e­vated, in­vestors are right to ques­tion the bank’s risk as­sess­ment de­spite the man­age­ment’s as­sur­ances that they have pulled up their socks on this.

This is one rea­son the stock fell 8% dur­ing the day de­spite a nar­rower-than-ex­pected loss of ₹ 940 crore re­ported by the bank.

The com­ing quar­ters too don’t look good for PNB. It still has to do 47% of the pro­vi­sion­ing to­wards the fraud. It has to pro­vide ₹ 1,208.7 crore to­wards bond port­fo­lio losses too, as the lender had availed of the reg­u­la­tory lee­way of spread­ing the pro­vi­sion­ing over four quar­ters. It has ex­po­sure to 20 of the 28 large bor­rower cases cur­rently un­der­go­ing in­sol­vency pro­ceed­ings.

Of these, the res­o­lu­tion of Bhushan Steel and Elec­tros­teel Steels net­ted PNB a re­cov­ery of about ₹ 3,200 crore dur­ing the quar­ter. In all, the bank has re­cov­ered ₹ 8,445 crore in a sin­gle quar­ter, much higher than the re­cov­ery of ₹ 5,617 crore in all of FY18.

It is hoped the mo­men­tum in re­cov­ery will be sus­tained and the man­age­ment has an am­bi­tious tar­get of ₹ 20,000 crore of re­cov­er­ies for the year.

That said, PNB would find it dif­fi­cult to keep its head above wa­ter given that it con­sciously is shrink­ing its bal­ance sheet through shed­ding riskier loans.

Re­tail loan growth at 10% is not im­pres­sive when com­pared with peers. Nev­er­the­less, the core in­come grew 27%, of­fer­ing a ray of hope.

The PNB stock is still the cheapest among pub­lic sec­tor lenders. And may re­main cheap for quite some time.

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