When Punjab National Bank (PNB) signed up star cricketer Virat Kohli as brand ambassador last September to improve its brand image, little did the lender know that its stock price would begin to reflect Kohli’s performance.
Shares of PNB have galloped 31% so far in 2017, and the stock remains the biggest gainer among peers in sector indices. It has even beaten all sector indices in returns.
Getting a popular brand ambassador is an old trick in marketing but rebuilding a balance sheet to lure investors by sheer doggedness is the oldest and perhaps the wisest formula. PNB seems to have employed both and the numbers of the third quarter reflect this. The lender posted a fourfold jump in net profit growth to Rs207 crore for the quarter ended December.
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At a time when even the best in class are struggling to reduce slippages, the country’s fifth largest lender’s fresh bad loans have reduced for the second straight quarter to Rs5,660 crore in the third quarter. But the most heartening metric is the rise in recoveries and upgrades, which very few of its peers have managed. Granted that sequentially, PNB’s cash recoveries and upgrades are down but the bank has made cash recoveries of Rs10,121 crore in the nine months ended December which is more than twice what it managed in all of 2015-16. The bank had set up a war room for bad loan resolution which is giving out results as even upgrades are significantly up for the nine months ended December at Rs4,604 crore.
Given that its gross non-performing assets ratio continues to be above 13% and net bad loan ratio of 9.09% is not flattering either, investors would do well by holding on to a thread of caution. But the bank isn’t playing with fire as its provision coverage ratio increased for the third straight quarter to 54.96%.
Just as Kohli’s weakness lies in deliveries outside off stump, PNB’s weakest point is its loan disbursals. Its loan book hasn’t grown at all and net interest income, the core income that the bank earns through lending, is understandably down 9% from a year ago. While the core income fall was expected, the lack of growth in loans spells trouble for future earnings. If it was not for retail loan growth of 12%, PNB’s portfolio would have shrunk. Even as the curse of the currency withdrawal is visible on the loan book, the bank’s deposits surged with the blessings of demonetisation.
Best of all, despite the surge in its price, the stock trades 0.77 times the estimated price-to-book value for fiscal year 2018, lower than most of its peers.