United Bank of India, OBC slipped into red before merger with PNB

Erstwhile state-owned lenders United Bank of India (UBI) and Oriental Bank of Commerce (OBC), which have now merged with Punjab National Bank (PNB), posted huge losses in the fourth quarter, which would erode the capital base of PNB, the anchor bank.

While UBI posted a net loss of around Rs 6,700 crore in the quarter ending March 2020 (Q4FY20), OBC logged a net loss of around Rs 2,700 crore, an executive said, requesting anonymity. In the year-ago quarter, UBI had reported a net profit of Rs 95 crore, while OBC’s profit was Rs 201 crore.

Both the banks had posted continuous profits in the first three quarters of 2019-20, before slipping into heavy losses in Q4, ahead of the amalgamation that took place on April 1, 2020 — mostly because of tax-related and provisioning issues.

The quarterly results of the two banks are not in the public domain as the tenure of the board of directors ended following the merger with PNB, which had approved the financial results of the banks on Friday.

The annual net loss for UBI came at around Rs 6,400 crore and for OBC at around Rs 2,250 crore, sources said. PNB, on the other hand, posted a net loss of Rs 697 crore in Q4 (compared to a net loss of Rs 4,750 crore in Q4 of 2018-19) and a net profit of Rs 336 crore for the entire financial year.

When the PNB management met to approve the results of UBI and OBC, it found glaring gaps in tax-related provisions and lack of provisioning towards staff pension (to bring it in line with the practice followed by the PNB), a top bank executive said, requesting anonymity.

The finances of UBI and OBC will eat into the capital base of PNB, which started the financial year as the country’s second-largest state-owned bank. The bank’s capital adequacy ratio, considered to be one of the key indicators of its health, was 14.14 per cent at the end of March 2020 (before the amalgamation process kick-started).

Acknowledging the losses posted by the two banks, PNB Managing Director and chief executive officer S S Mallikarjuna Rao told Business Standard in an interview that the lender’s capital adequacy ratio is expected to come down to 12.75 per cent — a reduction of 139 basis points — after the merger.

This will, however, be higher than the minimum regulatory requirements. The Reserve Bank of India requires banks to maintain the capital adequacy ratio at 11.5 per cent. Banks are required to maintain a minimum level of capital to ensure they do not lend all the money they receive as deposits and keep a buffer to meet future risks.

“We would require capital for the bank’s growth plan. I want to anyhow maintain a minimum capital adequacy ratio of 13 per cent at any point of time,” Rao said.

Rather than knocking at the government’s door for capital infusion, the bank is looking at multiple options to raise capital. It includes taking the qualified institutional placement route, going to the public and asking Life Insurance Corporation if they are interested in pumping in money, the PNB chief said.

PNB wants to avoid going to the government for funds as it has already heavily capitalised the bank in the past few years, taking its total shareholding to 85 per cent. The stock markets regulator, the Securities and Exchange Board of India, wants all firms to keep a minimum threshold of 25 per cent for public shareholding (as against 15 per cent in this case). The bank has to reduce the government’s share to 75 per cent within three years.

PNB will hold a board meeting in the next two-three weeks to finalise the opening balance sheet of the amalgamated entity and firm up its capital requirements.