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Punjab National Bank’s (PNB) June-quarter metrics didn’t spell fresh trouble, nor did it see any big relief in the wake of the second covid wave.

The public sector lender managed to show a healthy operating performance despite its loan book hardly showing any growth. What has come to the rescue of PNB is a sharp reduction in operating expenses through incremental gains from the merger with two other public sector banks and low deposit rates.

PNB swallowed Oriental Bank of Commerce and United Bank of India and the merger took effect on 1 April 2021. The merger triggered rationalization of the branch network in addition to combining various verticals of the three lenders. The bank has rationalized more than 500 branches post the merger and may further merge branches to reduce operating expenses.

Stress presists
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Stress presists

The 8.4% drop in operating expenses lifted the operating profit by 15.5% year-on-year (y-o-y).

That said, core interest income didn’t show any spark due to lack of credit growth.

Managing director CH. S.S. Mallikarjuna Rao is hopeful of credit growth revival in the coming months. At worst, the bank may see a 6-8% loan growth for FY22, he said in an earnings call on Tuesday. A strong pick-up in private capital investment may lift it to even 8-10%, he added.

PNB needs loan growth to bring down its elevated bad loan ratios that are more a fallout of legacy defaults than the current pandemic stress.

Asset quality continued to be the fly in the ointment for PNB as gross bad loans remained above 14% for the June quarter. The lender has a restructured loan pile of around 12,000 crore that needs to be monitored for stress. The bank saw 8,241 crore worth of loans slip during the June quarter. This meant that provisions remained elevated, with 4,679 crore set aside during the quarter.

PNB is hopeful that it would not need to make high provisions in the coming quarters, citing improving collections in July. A provision coverage ratio of 80% adds some conviction to this hope. That said, the legacy bad loan pile will continue to bother.

PNB’s pain points are corporate loans. About 13% of its corporate book and 18% of its micro, small and medium enterprises (MSMEs) book were non-performing as of June. Its retail loan book bad loan ratio is also close to 6%, higher than peers’, which is a worry.

Besides loan growth, PNB must be able to increase recoveries to bring down its bad loan ratios. The newly minted bad bank can help and PNB too is making efforts.

“We are expecting close to 3,000 crore recovery every quarter this year," said Rao. For the June quarter, recoveries were down at 3,954 crore.

The bank’s success with recoveries hinges on how limited would be the impact of a potential third wave on companies. As such, the pandemic has weakened the balance sheets of small businesses, which mean recoveries here would be challenging.

Analysts believe that operating metrics may continue to improve, given merger benefits have begun to accrue and the management’s commitment to reduce incremental provisioning gives additional comfort.

Given that the bank has not been able to dent its pile of defaulted loans, valuations remain subdued. Despite gaining 9% since April, the stock trades at a deep discount to its estimated book value for FY22.

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