Home >Markets >Mark To Market >Fraud label on DHFL is not the biggest problem for Punjab National Bank

Punjab National Bank (PNB) has declared Dewan Housing Finance Corp. Ltd (DHFL) a fraudulent account. This means it will have to make 100% provisioning against its exposure of 3,688.58 crore. The stock fell 5.5% on Friday in reaction to the decision on DHFL’s status.

However, that is not the biggest problem for the lender or even its investors. It only makes an already challenging year worse.

A big unknown for investors is the fallout of the merger with Oriental Bank of Commerce (OBC) and United Bank of India on PNB’s capital.

FY20 metrics did not include the performance of the two lenders as the merger took effect on 1 April. According to a 25 June Business Standard article, both lenders reported huge net losses for the March quarter that could threaten PNB’s capital base. OBC’s net loss was 2,700 crore while United Bank’s net loss was 6,700 crore.

“The big blind spot for investors is the merger impact as financial metrics are not known yet. As such, for public sector banks, June quarter results would be critical," said an analyst, requesting anonymity.

It is clear that PNB will have a tough time providing for the hit on asset quality that comes from swallowing the two lenders.

Both banks have a poor track record of asset quality. OBC was under prompt corrective action (PCA) for 15 months before coming out of it in February last year. United Bank has also been under PCA, a regulatory quarantine for banks whose balance sheets were considerably weakened due to rising delinquencies.

Risk around the corner
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Risk around the corner

More importantly, the level of moratorium given by these banks is not known. For PNB, about 30% of its loan book was under moratorium as of May. The moratorium level is being seen as a key indicator of stress, especially in the case of small business loans.

As for capital, both OBC and United Bank’s capital adequacy ratios are poor and the key intent of the merger was that PNB’s larger and strong balance sheet would be able to fill some gaps. PNB’s capital adequacy ratio as of March was 14.14% while its common equity tier-1 ratio was 11.9%. The bank has announced a plan to raise 7,000 crore capital from the markets.

Analysts expect the synergies on costs and efficiencies from the merger to only reflect in FY22. “The merger with OBC and United Bank will be effected from 1Q and we expect synergies to take time and weak-underwriting standards at the three banks as a risk," analysts at Jefferies India Pvt. Ltd wrote in a 22 June note.

Meanwhile, in the current year, the bank may have to not only fortify its own capital but also fill in the holes of the two lenders it has swallowed. Help from the government could be hard to come by given the constraints on the Centre’s revenues this year.rd to come by given the constraints on the centre’s revenues this year.

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