PNB's Q4 points to moderation in NPAs

Stock up 5% on Tuesday, but analysts concerned over lack of clarity on critical aspects

From posting its highest quarterly loss in the March 2016 quarter to turning profitable, FY17 has been a remarkable period for Punjab National Bank (PNB). The public sector lender posted a net profit of Rs 261.9 crore in the March 2017 quarter (Q4), against a net loss of Rs 5,367 crore in Q4 of FY16.
 
A sharp rise in net interest income, up 33 per cent year-on-year (y-o-y) to Rs 3,683 crore in Q4 and an equally noteworthy curbing in provisions for non-performing asset (NPAs) — down from Rs 10,773 crore a year ago to Rs 4,910 crore in Q4, helped the bank sustain its profit track record.
 
Fresh formation of NPAs also seemed to stabilise in Q4. Gross NPA ratio and net NPA ratio also fell to 12.53 per cent and 7.81 per cent, respectively, and are positive. Recoveries (of bad loans) at Rs 2,084 crore and upgradation (NPAs turning to standard loans) at Rs 2,981 crore in Q4 were also healthy. However, loans which turned bad in Q4, at Rs 6,896 crore, also increased by 28.1 per cent sequentially. Nonetheless, this metric was curbed at Rs 22,415 crore for FY17, nearly half of the FY16 levels. Capital adequacy ratio remained stable at 11.66 per cent in FY17 largely helped by an increase in additional tier-1 ratio at 1.04 per cent, against 0.54 per cent in FY16.
 
Even on operations, a two per cent y-o-y growth in total advances to Rs 4,41,751 crore and three per cent y-o-y growth in domestic advances to Rs 3,91,750 crore are seen as positives. Deposit growth at 12.4 per cent to Rs 6,21,704 crore and growth in the low-cost current account–savings account (Casa) deposits at 26.4 per cent are largely in line with the growth posted by the industry. Notably, share of Casa deposits have risen to nearly 46 per cent from 41.6 per cent a year ago. But despite this, domestic net interest margins (NIMs) for FY17 declined by 30 basis points to 2.69 per cent. Nonetheless, analysts seem satisfied with the overall positive headline numbers. “Reduction in net NPA, decline in restructured book and business growth after being sluggish for two-three quarters are the positive takeaways from Q4 results,” said Siddharth Purohit of Angel Broking.
 

However, he suggested a finer reading was important to understand the significance of improvement in asset quality. In fact, analysts said they weren’t too pleased with the disclosures made in Q4. “There are a few grey areas in Q4 results, especially on restructured book and slippages. Without clarity on this, it is tough to get a full picture of Q4 results,” an analyst with a domestic brokerage said. In addition, Asutosh Kumar Mishra of Reliance Securities, pointed out there may have been change in assumption with respect to employee costs, which helped the bank post profit in Q4. Employee costs stood at a negative Rs 584 crore in Q4.
 
The guidance by the new chief executive officer (CEO) on continuance of the bank’s aggressive stand on recoveries and resolution will also be closely monitored by analysts. Sunil Mehta, PNB CEO and managing director, who took charge only a week ago, in a media interaction affirmed his first priority would be to improve the health of the bank. “A multi-pronged approach will be needed to arrest NPAs,” he said. This was  important given that the NPA ratio was at over six per cent and the prompt corrective action (PCA) plan had kicked in. PCA has put restrictions on dividend payouts and hence, PNB had to skip dividend for 2016-17. As for recoveries, an executive with the bank said PNB had announced a one-time settlement for accounts fully provided for.