Record losses the first sign of greater pain ahead for PNB in FY19

Bank has to carry forward Rs 100 billion provisioning in FY19 while weak capital base will impact growth of advances

Punjab National Bank (PNB) posted record losses at Rs 134 billion in the March 2018 quarter (Q4) which was way higher than the Rs 26-27 billion analysts had estimated. Moreover, for the first time, PNB posted Rs 4.5 billion of operating losses. With higher slippages of Rs 310 billion (extrapolated from the difference between the 9- months December 2017 and FY18 slippages) resulting in interest reversal, the bank’s net interest income (difference between interest earned and expensed) declined sharply by 16.8 per cent year-on-year in Q4. This, along with a sharp rise in cost-to-income ratio (61.5 per cent from 43 per cent in the year-ago period), impacted the operating performance.

But it’s not over yet. The bank will have to carry forward some pain — to the tune of Rs 100 billion — in FY19 as it uses various relief options given by the RBI to spread the provisioning pain over some quarters, instead of taking a one-time hit. This could be in terms of mark-to-market losses (due to high yields impacting the market value of investment book), fraud-related provisions, provision on insolvency and bankruptcy code, among others (see table). This makes the FY19 earnings picture gloomy as this amount (RS 100 billion) is over 80 per cent of PNB's average operating profit in the past two fiscals.

“Despite the bank having used multiple options, we believe a tail end of provisioning burden will be present in FY19 as well, which will keep the earnings under pressure,” says Lalitabh Shrivastawa, assistant vice president-research at Sharekhan.

Besides, advances are also expected to get hurt owing to the slumped capital base of the bank due to the higher provisioning/slippages. As of March 2018, tier-1 capital and total capital adequacy ratio were at 7.1 per cent and 9.2 per cent, respectively. Moreover, the bank’s net non-performing assets were 119 per cent of its net worth as of March 2018, leaving nothing on the desk for the bank. Although, analysts/experts expect additional capital infusion by the government during FY19 to protect the bank.