Is Punjab National Bank (PNB) finally cleansed of its legacy toxicity and fraud-related mess?

The last time investors asked this question the management assured them that it had bounced back. Turns out that wasn’t the case as the third-largest public sector lender suffered a loss of 4,749.64 crore in the March quarter, exceeding what analysts had feared. This took the full-year loss to a massive 9,975.49 crore, the worst among banks.

No wonder investors punished this betrayal by driving the PNB stock down more than 3% on Tuesday. What was more painful is that its peers such as Bank of Baroda (BoB) and even State Bank of India (SBI) looked better even though they too were faced with setbacks on asset quality during the March quarter. BoB’s loss was a bearable 991.37 crore, while SBI got away with a sharp drop in profit.

Recall that PNB had reported a staggering loss in the March quarter of FY18 after jeweller Nirav Modi’s fraudulent transactions came to light. Given that the March quarter of FY18 was an exceptionally bad one, it would be a folly to compare results.

To be fair, the bank’s March quarter loss in FY19 was the result of it ramping up provisioning against dud loans and rendering its balance sheet safer. Sunil Mehta, managing director and chief executive of PNB, said in a press meet that the lender wants to provide confidence to investors by insuring its balance sheet from bad loans. Its provision coverage ratio is now 74.5%, higher than 68% a year ago.

Ostensibly, its bad loan ratios have improved from earlier and the lender has even managed to bring down the stock of its bad loans from the year-ago period. PNB even had decent recoveries of roughly 4,000 crore in the March quarter and a healthy 20,000 crore for FY19.

That said, the lender’s slippages have doubled from the previous quarter and includes the troubled Infrastructure Leasing and Financial Services Ltd and Jet Airways (India) Ltd.

(Graphic: Vipul Sharma/Mint)
(Graphic: Vipul Sharma/Mint)

Delays in resolution of insolvency cases have cost the lender dearly as anticipated recoveries didn’t materialize. Fresh pain points have emerged as well, evident from the surge in slippages.

To add to the wounds, PNB’s loan growth hasn’t picked up meaningfully. Its domestic loan growth was 14% but as its international book shrank, the overall balance-sheet expansion was just 8.4%.

Even if the lender doesn’t experience an increase in loan growth, it would need capital. The bank’s common Tier-1 equity is 6.2%, precariously close to the regulatory minimum of 5.5%. Its attempts to sell non-core assets haven’t borne fruit yet. PNB was wounded by a massive fraud in FY18 but the fresh bruises this year are reason enough for investors to worry.