PNB's December quarter pain likely to continue

Looming asset quality pressure taking a toll on its stock

The December quarter was not only disappointing for Punjab National Bank (PNB) as it faced income and asset quality pressures, but the management commentary also suggests there is more pain ahead.

With net interest income (Rs 4,223 crore) down three per cent over a year, net interest margin came under pressure; the latter fell to 2.9 per cent versus 3.3 per cent a year ago. But provisioning for bad loans at Rs 3,775 crore was twice the figure recognised in Q3 of FY15, and came as a bolt to the Street, as the bank slipped into loss (before tax) of Rs 858 crore in the quarter. If not for tax reversals of Rs 909 crore, PNB would not have recorded a net profit of Rs 51 crore in Q3’ FY16, which nevertheless was down 93 per cent y-o-y and a huge miss from Bloomberg estimates of Rs 704 crore, and PNB’s stock tanked seven per cent on Tuesday.

While operating performance was weak, gross non-performing assets (NPA) as a percentage of loan book jumping from 5.97 per cent in Q3’ FY15 to 8.47 per cent in Q3’ FY16 also hurt sentiments. What’s more alarming is the loan slippage at Rs 13,482 crore in Q3’ FY16. Shweta Mane-Daptardar of KRC Research notes that slippages in Q3’ FY16 remain at an elevated level. “Incremental slippage from infrastructure and steel sectors are not abetting and if more accounts move out from restructuring to NPA, it is worrisome,” she adds. Currently, iron and steel and infrastructure sectors account for over 60 per cent of total restructured accounts (including 37 per cent of power sector accounts). The management, too, has cautioned for similar stress in Q4’ FY16. Analysts thus warn that investors should brace for prolonged asset quality deterioration.

PNB’s efforts to increase its retail operations, too, is yet to take shape as revenues from retail banking (Rs 3,471 crore) declined by 33 per cent y-o-y in Q3’ FY16, while that of treasury (Rs 3,900 crore) and corporate banking (Rs 6,300 crore) grew 22 per cent and seven per cent y-o-y, respectively. Advances at Rs 3.94 lakh crore in Q3’ FY16 increased by about eight per cent y-o-y, again falling short of the expected 10 per cent growth.

Given this scenario, analysts feel PNB is headed for capital infusion, which in Daptardar’s view will lead to more dilution in return on equity.

Siddarth Purohit of Angel Broking feels PNB may find it difficult to raise capital from other investors given its low ROEs (around three per cent).