Rs 114-bn PNB scam: Experts see share price slipping to Rs 90-100 levels

At Rs 114 billion, the hit could be about 23% of PNB's current net worth

Shares of Punjab National Bank (PNB) are down 28 per cent in four trading sessions, including Monday’s 7.4 per cent fall. 

The nearly Rs 111-billion decline in PNB’s market value, following the alleged Rs 114-billion fraud detected on February 14, may suggest that there is value in the counter. But, most experts said investors should not hurry as the market had not factored in the event completely. So, the bottom is yet to come.

For one, the bank is facing pressure on account of non-performing assets (NPAs). With the latest fraud detected, these will weigh on its net worth, even if the final liability may be lower than the declared fraud amount. “The stock can find a bottom anywhere between Rs 100 and Rs 110, which is roughly three times the reworked adjusted book value (after) accounting for an odd Rs 340 billion of outstanding net NPAs and assuming the maximum hit from the scam will be 50 per cent (of the fraud amount),” said G Chokkalingam, founder, Equinomics Research and Advisory.

At Rs 114 billion, the hit could be about 23 per cent of PNB’s current net worth. Given that the lender will need to provide for the fraud (amount not clear) as well as expected haircuts on the loans being resolved at the National Company Law Tribunal, the stock is likely to remain under pressure.

“Apart from additional liabilities on the back of this fraud and NPA pressure, potential fines charged by various authorities, domestic and foreign, will affect the bank’s profits,” an analyst with a domestic brokerage said.

There could be some pressure on the bank’s business, and consequently on earnings. “When this kind of a fraud happens, the bank’s attention generally moves away from business to other things like containing losses and improving systems,” the analyst said.

Against this backdrop of uncertainties, and with the bank’s overall exposure to the gems and jewellery industry, forecasting earnings and financial performance becomes difficult. “There are many uncertainties in terms of the value of the assets (of the Nirav Modi group companies), how recoveries will be made, and potential haircuts on bad loans. These do not lend any confidence in terms of valuations. I see a downside till around Rs 90-100 for the stock,” said another analyst.

Though the recapitalisation funds to be infused by the government and expected sale of non-core assets will lower the burden on the bank, the PNB stock may see abrupt rallies that may not sustain till there are clear signs of improvement in its core business of lending. 

For now, do not bottom fish, caution experts.