As Punjab National Bank puts house in order, its shares fly
Given that its financials are improving and its relative size with respect to its peers, Punjab National Bank is seen as a strong contender for a large capital infusion by the government
Why would the stock of the third-largest lender in India defy gravity when its quarterly profit rose an embarrassing 2%?
But that is exactly what happened to Punjab National Bank and the answer is worth exploring. Its shares closed 5% higher on a day when the benchmark indices gained only 1%. This was on top of the massive 36% increase that came after the announcement of recapitalization by the government.
It has a lot to do with the bank’s turnaround plan.
A little more than a year ago, the lender went down in history to become one having made the biggest quarterly loss ever. Its bad loan metrics made up for the rest of the grotesque story with gross bad loans coming at 13% of the loan book. This ratio has hardly moved for the bank which would mean that the lender has hardly fixed its house.
But Punjab National Bank has been able to bring down fresh slippages meaningfully to Rs8,449 crore in the September quarter from as high as Rs11,245 crore a year back. Its stressed asset ratio has also shown a fall to about 15% from 18%.
Perhaps the fact that its loan book has begun expanding and grew by a reasonable 8% for the September quarter also helped it prune its toxic assets and increase its core income. Ergo, the net profit of Rs561 crore.
Let’s also note that Punjab National Bank hasn’t cut corners to get profit by reducing its provisions. Its coverage ratio is 59.23%, a sharp jump from 53.32% a year back.
This is not to say that the lender is stronger than it was or even that it is better than its peers. Punjab National Bank has nine large accounts referred under the Insolvency and Bankruptcy Code and potentially big haircuts that could hurt the lender. But the bank has enough insurance by way of provisions.
Given that its financials are improving and its relative size with respect to its peers, Punjab National Bank is seen as a strong contender for a large capital infusion by the government. The lender is keen to monetize its non-core assets, issue Tier-I bonds and even mull a qualified institutional placement to shore up capital.
Hence the stock deserves its rerating by analysts when it is still trading at a multiple of just two times its estimated book value for fiscal year 2018.