How sustainable is the PNB stock rally?

Interest has increased in last 3 days, leading to 63% gain in the stock

Just when the momentum was weak for the Punjab National Bank (PNB) stock, an announcement from the finance ministry turned the tide.

PNB has gained 63 per cent since Tuesday, when the recapitalisation plan was rolled out by the government. Even as stocks of other public sector banks (PSBs) pared some gains on Thursday, PNB was an exception with an upmove of 5.6 per cent.

There are many reasons to support this mega rally. Being a capital-starved bank among the top-rung PSBs, the government’s plan to infuse money is a positive. PNB’s tier-1 capital ratio was at 8.94 per cent, while the common equity tier-1 ratio was 7.91 per cent, slightly below the eight-per cent threshold.

Considering that banks will have to adopt a new accounting norm from FY19, including that of capitalisation, an infusion of money is most welcome.

Some analysts turned positive on PNB over the past six-eight months, because of its marginally improving fundamentals.

After negligible improvement in its core operating income at ~19,082 crore in FY17, operations were back on track in the June quarter, with a 10 per cent year-on-year (y-o-y) growth.

Even on the provisioning front, things seemed to ease for the bank. Advances, led by retail loans, brought in much of the growth.

According to analysts at Kotak Institutional Equities, PNB is likely to report net interest income growth of 11.5 per cent at ~16,715 crore, while net profits may expand 86 per cent y-o-y to ~2,460 crore in FY18. All these could restore investors’ confidence in the stock.

Until Wednesday’s rally, the stock was trading at a benign valuation (0.9 times its FY18 price-to-book), making it an attractive candidate among PSBs.

However, even as fundamentals are improving after two years of a bad spell, mere expectations or low valuations aren’t adequate to support the rally. There are still some pockets of concern. With the gross non-performing assets (NPA) ratio was 13.7 per cent as of June 30, 2017, and net NPA ratio was 8.7 per cent, PNB’s asset quality is far from comforting.

While provisioning costs might have stabilised, the provision coverage ratio is still at a dismal 40 per cent, indicating at least six to eight quarters of clean-up. Besides, there is a see-sawing nature of loan recovery that could get aggravated as more accounts are referred to Insolvency and Bankruptcy Code proceedings.

Analysts at Prabhudas Lilladher estimate an incremental provisioning of about ~1,000 crore towards such accounts in the coming quarters.

Thus, considering the uncertainties, sustainability of the current rally is anybody’s guess. Quarterly results due out in a few days would be the best indicator of this.