Home >Markets >Mark To Market >Stress at PNB seems under control, but asset quality needs monitoring

Punjab National Bank’s (PNB) asset quality may have finally turned a corner. India’s second largest public sector lender managed to contain stressed loans amid the ongoing merger process and a pandemic.

But investors are not ready to change their view on the stock, which fell by more than 5% on Monday. Some analysts have retained their sell rating on the bank, as PNB fell short on many metrics compared with peers.

The bank reported a gross bad loan pile of 14.71% of total loans, excluding the benefit of the judicial standstill on asset recognition.

In essence, PNB’s actual fresh slippages amounted to over 12,000 crore against the reported 2,326 crore.

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NPL lag

Worries increase when the provisioning done by the lender seems small versus the actual stress. PNB has set aside 3,118 crore as provisioning for bad loans. That took total provisions 16% up sequentially and the coverage ratio climbed to 85.16%. But overall provisions are up just 1.6% from a year-ago period even though slippages are higher.

To be sure, the management said that fewer borrowers approached the bank for restructuring loans and asked for easier repayment terms than it had originally anticipated. Requests for such loans totalled 12,000 crore, which is far lower than the anticipated 40,000 crore, Mint reported.

The bulk of this has come from large corporate accounts and the bank is already implementing restructuring for 9,000 crore.

Meanwhile, analysts at Kotak Institutional Equities said that the total slippage ratio works out to be just 2%. This should give some comfort to investors.

That said, the lender has high exposure to micro, small and medium enterprises (MSMEs). Such loans form 17.7% of its total loan book. Within MSMEs, it has a large exposure to the most vulnerable businesses. This increases the odds for incremental slippages for the bank. For now, the government’s credit guarantee scheme will protect the bank from risks.

Further improvement in asset quality is easier to come when there is growth in the loan book. Here, PNB continues to disappoint. In contrast to its peers, the lender reported loan growth below 1%. In comparison, Bank of Baroda reported 8% growth, while ICICI Bank reported 15% growth. Even State Bank of India (SBI) reported a decent 6.73% growth on a balance sheet thrice the size of PNB.

To be sure, PNB has recently raised 3,800 crore capital, which would aid its loan growth plans. The bank plans to raise another 3,200 crore through equity in the current quarter.

The stock has gained over 18% in the past one week, driven by expectations of better performance after SBI reported robust metrics.

“While the immediate covid impact seems contained, leading us to raise estimates, we believe SBI offers a better risk-reward with lower risk book value dilution and absence of merger-related overhang," wrote analysts at Kotak Institutional Equities in a note.

Gains of the past three months have turned PNB shares into outperformers versus the sector index. However, whether these gains sustain remains to be seen.

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