Corrected: PNB posts surprise quarterly profit on drop in provisions

(Corrects para 6 to show stressed loans recovery sum is 166.08 billion rupees (not 160 billion) and period is 3 quarters (not latest quarter))

(Reuters) - India's state-run Punjab National Bank (PNB), which has been hit badly by a $2 billion fraud, posted a surprise quarterly profit on Tuesday, helped by a sharp drop in provisions.

The results come nearly a year after PNB disclosed that two jewellery groups had defrauded it in India's biggest banking scam, raising credit overseas with fake guarantees issued by rogue bank staff.

PNB, India's second-largest state-run lender by assets, reported losses for three straight quarters following the scam, on account of higher provisions. This included the biggest ever quarterly loss for an Indian bank recorded by PNB in the March quarter last year.

In the three months to Dec. 31, PNB posted a profit of 2.47 billion rupees ($34.44 million), compared to a profit of 2.3 billion rupees a year earlier, and compared to analysts' expectations for a loss of 10.63 billion rupees, according to Refinitiv Eikon data.

"We are back in (the) black, after 100 percent provisions for all our commitments," PNB chief executive Sunil Mehta told an earnings briefing.

The bank's recovery of stressed loans in the first three quarters of the fiscal year was 166.08 billion rupees, a company executive said.

Provisions in the quarter, which included those for bad loans and funds set aside in relation to the scam, dropped 38.3 percent to 27.54 billion rupees.

The bank set aside 20.14 billion rupees in the quarter for the illegal guarantees, completing its provisioning for the 143.57 billion rupees it owes banks for the scam.

Asset quality improved quarter-on-quarter, with gross bad loans as a percentage of total loans easing to 16.33 percent at the end of December from 17.16 percent at the end of September. This was still higher than 12.11 percent a year earlier.

PNB shares were up about 1 percent on Tuesday afternoon after the results.

($1 = 71.7210 rupees)

(Reporting by Chris Thomas in Bengaluru and Manoj Kumar in New Delhi; Editing by Muralikumar Anantharaman)