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For Punjab National Bank (PNB), FY21 didn’t bring any progress. True, the lender didn’t report further deterioration in its asset quality, although the jury is still out whether the bank will be able to reduce its toxic loan pile in FY22.

PNB’s asset quality metrics hardly moved the needle. Its gross bad loan ratio remained around 14% for FY21 even though its loan book shrank by 3%. The lender saw a one-time large recovery from a corporate loan account which helped support its income besides bringing down its bad loans. The 6% fall in slippages in FY21 should be encouraging and the fact that the lender has a restructured loan pile less than 2% of its loan book is also a comfort. The bank wrote off 24% less loans in FY21 than it did in FY20. It shows that not many bad loans turned worse during a pandemic year.

That said, the sharp fall in upgrades and recoveries offset this comfort. Further its special mention accounts (SMA), those where repayments are overdue by over a month, have increased. Restructured loans may not a big percentage of the book but they may not remain so. The regulator has allowed banks to restructure in FY22 as well with certain leeway and PNB may show an increase in this pile. The lender has an exposure of 1.26 trillion or 17% of its loan book to small businesses which are the most vulnerable. Small businesses account for 20% of the bad loan stock of the lender.

Another point of worry is that PNB’s bad loans from its retail book have risen sharply. More than 5% of the bank’s retail credit has turned bad in FY21, which is higher than 3.4% in previous year. Of course, its most weak portfolio remains micro, small and medium enterprises (MSME) where 20% of the book has turned bad.

PNB’s long drawn battle with bad loans has ensured that the shares trade at a deep discount to its estimated book value for FY22. Analysts at Jefferies India Pvt Ltd sum up the reason behind these beaten down valuations. “PNB's performance on asset quality is lagging behind peers and it has a negligible buffer on provisions. Moreover, its weak core operating profitability profile offers little buffer against credit cost shocks," they wrote in a note.

The bank raised 1,800 crore through qualified institutional placement (QIP) last month. Its common equity Tier-1 capital ratio was 10.62% as of March and the overall capital adequacy ratio was 14.32%, higher than regulatory minimum requirements. But the capital raising hasn’t benefited the stock mainly because of the weak asset quality. As more capital is set aside for bad loans, loan growth is going to remain tepid for PNB. That means no respite for investors.

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