NPA rules and Rs 110-bn fraud can put one-fourth of PNB's net worth at risk

The fraudulent transactions, which can be as much as $1.77 bn, along with new NPA rules can lead to a surge in provisioning

Shares of Punjab National Bank (PNB) fell almost 10 per cent on Wednesday due to twin negative news. While the new framework on non-performing assets (NPA) resolution could mean higher loan provisioning for the banking sector, PNB said it had detected fraudulent and unauthorised transactions worth $1,771.69 million (Rs 113.6 billion) at one of its branches in Mumbai. 

The bank’s profit and overall asset quality are expected to take a hit even if the fraud alone is considered. Some analysts say if the entire amount attributed to the fraud becomes NPA, as much as 25 per cent of the bank’s estimated net worth of Rs 480 billion could be affected.

The bank, however, said these transactions were contingent in nature. Hence, based on the crystallised amount (one that will become the actual liability), the bank will need to make additional provisions. The event will also hurt PNB's asset quality in the March 2018 quarter. While the finer details of the fraud have not been provided, making it difficult to gauge the exact impact, analysts say it will dent the bank's financials.

PNB has already reported elevated levels of provisioning (up 80 per cent sequentially and 74 per cent y-o-y) during the October-December 2017 quarter. The new developments will worsen its provisioning pain.

“It is not very clear whether the damage (to the bank) will be equivalent to this (entire amount of fraudulent transactions). If at all there is any damage of this magnitude, then definitely it is a serious issue,” said G Chokkalingam, founder and managing director, Equinomics Research. 

R Sreesankar, co-head — equities, Prabhudas Lilladher, said while there was very little information available, it was a big negative for PNB. “We need to see how much of PNB’s exposure is secured and unsecured, as all unsecured exposure will have to be provided for upfront. If this is classified as fraud, then 100 per cent provisioning is required. This will have an impact on its net worth and will be deducted from the bank’s reserves. If the entire Rs 110 billion is at risk, then it is roughly a fourth of the bank’s book value.” 

The impact of this development will not only be seen on PNB but on some other banks as well. “Though the legality of the case may be decided one to two years down the line, a contingent provision needs to be created by PNB and other banks that may be involved (in this case), based on the crystallised amount, in the March 2018 quarter itself,” said Asutosh Kumar Mishra, analyst at Reliance Securities. “The crystallised amount will have to be added to the GNPAs (gross non-performing assets),” Mishra added. 

Worse, although PNB's stressed assets were very high at Rs 671.29 billion as on December 31, 2017 (14.13 per cent of advances), these were improving over the last three quarters. 

The bank is in the process of selling part of its non-core assets, such as holdings in PNB Gilts, PNB Housing Finance and UTI Asset Management (UTI Mutual fund). The government, too, has announced a recapitalisation fund infusion of about Rs 55 billion. These will provide some cushion to the bank, but the bank will need to accelerate some of its asset sale plans. The street is also hoping for some extra help from the government. “Considering the impact of the new NPA rules, some help from the government to PSBs can be expected in the next financial year,” said Chokkalingam.

Experts are waiting for more clarity on the fraud-related issue. But, considering the potential impact of the two developments on the financials of PNB, the stock is likely to remain under pressure.