PNB's gross NPAs jump to 6% in Q3

Analysts expect asset stress to stay, as most of the build-up emanates from recast portfolio

It was another bad quarter for Punjab National Bank, as the accretion of impaired assets continued in the December quarter. Be it the build-up of impaired assets or decline in productivity, it has reported a continued deterioration across all parameters. Gross non-performing assets are six per cent of advances and restructured assets account for 10 per cent of advances. Provisions has also declined 609 basis points (bps) sequentially to 37.9 per cent. Analysts are concerned, as most of the impaired assets are previously restructured.

Profitability took a hit, thanks to a continued accretion of impaired assets. Other than the decline in net interest margin, the build-up in impaired assets and poor coverage ratio has given investors the jitters. During the quarter, gross non-performing assets (NPAs) were at six per cent of advances. Net NPAs are up 56 bps sequentially to 3.82 per cent of advances. Says Angel Broking's Vaibhav Agrawal, “The bank found no respite on asset quality pressures. We believe asset quality will be poor in next quarter as well. However, it is expected to ease with economic revival in FY16.”

Along with a build-up of impaired assets, the quarter has also seen a decline in provisions. According to Emkay Global, NPA coverage, excluding technical write-offs, has fallen 609 bps quarter-on-quarter to 37.9 per cent, highest fall since the second quarter of FY13. Analysts also believe the cost-income ratio has risen during the quarter. The cost-income ratio is up 258 bps over a year to 50.2 per cent, which further impacted earnings growth.

During the quarter, the bank reported an 11 per cent growth in credit. Despite this, net interest income was up 0.3 per cent over a year. Deposits grew 15.1 per cent, compared to a year ago.

According to analysts, one of the key negatives was the decline in net interest margin (NIM), which eroded profitability. NIMs fell 33 bps over a year and four bps sequentially to 3.2 per cent in the December quarter. Net profit grew 2.5 per cent over a year to Rs 774 crore.

Analysts say at current market price, the stock is trading at 0.85 times FY16 adjusted book value. They believe earnings downgrades are likely. Given the steady increase in NPAs and the bank’s fragile capital structure, analysts think the bank might not have the resources to grow even when economy revives.