Home >Market >Mark-to-market >Q1 results: Wounded by fraud, no easy road ahead for PNB

Exactly eight quarters ago, the management of Punjab National Bank (PNB) put forth before investors an account of their strenuous efforts to manage bad loans. They said there now exists a “war room" for this. Fast forward to the June quarter (Q1) results, the war room hasn’t really done its job. The second largest public sector lender reported a 43.6% increase in its stock of bad loans for the June quarter as 7,363 crore slipped into the bad loans category. It had to write off loans worth 2,648 crore as these became toxic to the point of no return. The gross bad loan ratio stands at 18.36%, and the lender has the insurance of provisioning cover for only 62% of its loans.

Granted, the bank got pummelled by a massive fraud perpetrated by jeweller Nirav Modi, for which it has had to spread its provisioning over four quarters or risk sinking into oblivion due to the capital erosion. It has provided 63% towards the PNB fraud as of June and has to make provisions for the balance amount in coming quarters.

Considering fresh slippages are still elevated, investors are right to question the bank’s risk assessment despite the management’s assurances that they have pulled up their socks on this. This is one reason the stock fell 8% during the day despite a narrower-than-expected loss of 940 crore reported by the bank.

The coming quarters too don’t look good for PNB. It still has to do 47% of the provisioning towards the fraud. It has to provide 1,208.7 crore towards bond portfolio losses too, as the lender had availed of the regulatory leeway of spreading the provisioning over four quarters. It has exposure to 20 of the 28 large borrower cases currently undergoing insolvency proceedings.

Of these, the resolution of Bhushan Steel Ltd and Electrosteel Steels Ltd netted PNB a recovery of about 3,200 crore during the quarter. In all, the bank has recovered 8,445 crore in a single quarter, much higher than the recovery of 5,617 crore in all of FY18. It is hoped the momentum in recovery will be sustained and the management has an ambitious target of 20,000 crore of recoveries for the year.

That said, PNB would find it difficult to keep its head above water given that it consciously is shrinking its balance sheet through shedding riskier loans. Retail loan growth at 10% is not impressive when compared with peers. Nevertheless, the core income grew 27%, offering a ray of hope.

The PNB stock is still the cheapest among public sector lenders. And may remain cheap for quite some time.

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