The biggest mystery about Punjab National Bank’s (PNB’s) unexpected Rs.5,367 crore loss in the March quarter was the reaction of investors.
The stock gained 3.25% on a day the broader market dipped mildly.
One reason could be that these shares have already been battered. They are fifth from the bottom in terms of stock price returns over the last 12 months. PNB shares are also trading at 0.34 times their expected book value for the current fiscal year, but then all state-owned banks are trading below their one-year forward book values.
Perhaps investors chose to focus on the fact that total stressed assets (gross bad loans plus restructured loans) remained at almost a similar level as the preceding quarter—17.79% of total advances versus 17.41%.
PNB also took some one-time hits to both its bad loans and provisions. For instance, Rs.1,600 crore worth of loans to state distribution companies (discoms), which were not converted to bonds, had to be categorized as bad loans as per central bank requirements, said a note from Religare Securities Ltd. The bank also made other provisions such as Rs.140 crore for its state discom bonds and another Rs.170 crore for Punjab food credit—things that are unlikely to recur in the coming quarters.
So much for the good news. Is the worst over?
In a post-results media conference, the management demurred from using that phrase. The Religare note, on the other hand, says the PNB management stated that seven stressed sectors account for 55% of non-performing assets and with strong recoveries (of about Rs.15,000-20,000 crore), gross bad loans should start declining from the second quarter onwards.
It’s difficult to share this optimism.
For one, recoveries totalled Rs.4,262 crore in the just-ended fiscal year, but what will lead to a fourfold jump this fiscal year?
Second, PNB is still sitting on Rs.20,000 crore of restructured accounts. A good amount of slippages in the March quarter would have come from the restructured book, which stood at around Rs.35,000 crore at the end of the December quarter. Thus, this pile of restructured assets still represents a threat.
Third, the bank has said it has around Rs.11,000 crore in loans classified as SMA-2 (basically loans whose principal or interest payment is overdue for 61-180 days), according to Religare. This is another red flag for investors.
Fourth, at the end of the December quarter, the bank had Rs.14,000 crore of loans under the 5/25 and strategic debt restructuring (SDR) schemes. It is not known whether this pile has increased or decreased since then. The 5/25 scheme allows loan repayments by infrastructure developers to be stretched out over a longer tenure.
SDR allows creditors to convert debt into equity and take operational control of defaulting borrowers.
Despite an almost threefold increase in provisions year-on-year, PNB’s provision coverage ratio is only 51.06%. Capital adequacy looks okay at 11.28%, but losses of this sort and continuing pressure on asset quality pose a danger.
The writer does not have positions in the companies discussed here.