PNB: Trading income, tax savings aid Q1

While the bank witnessed lower slippages, overall stress still remains elevated

Despite beating Street estimates on net profit in the June quarter (first, Q1, in this financial year), Punjab National Bank’s stock fell nearly three per cent on Thursday versus a one per cent increase in the benchmark S&P Sensex on the BSE.

Why? A couple of factors. One, part of the improvement in bottom line was fuelled by a surge in non-core, non-sustainable treasury income, up 2.5 times to Rs 601 crore over the year-ago quarter. A lower tax rate (down 256 basis points to 42.9 per cent) also helped earnings.

Second and more important, slippages continued to be higher than recoveries in the quarter. While the absolute slippage number was much lower sequentially at Rs 7,533 crore, it was higher than recoveries worth Rs 6,000 crore. As a result, the gross non-performing assets (NPAs) ratio inched up both sequentially and over the year-ago quarter to 13.75 per cent. As long as this trend continues, NPAs are unlikely to come down, believe analysts.

Suresh Ganapathy, financials analyst at Macquarie Capital, says: “PNB’s slippages are still very high. They ought to come down. Stressed assets currently forms 130 per cent of their net worth if we include restructured assets, as well as NPAs (non-performing assets). That is a very large number.”

In a post results media interaction, the PNB management said they aimed to drive recoveries to a point where they are higher than slippages. Positively, the bank’s watch list stands at Rs 3,900 crore and is relatively lower. Siddharth Purohit, banking analyst at Angel Broking, though, says the NPA levels are too high and the pain could continue for some more quarters. However, the management remains positive. “The momentum is there for recoveries. This trend should set in the coming quarters. No one can say we are done with NPAs but, more or less, the tapering has happened,” said Usha Ananthasubramanian, managing director and chief executive officer.  

Another weak point in the Q1 results was a subdued loan growth of 2.8 per cent. While the management said this was seasonal, it could also be due to weak capitalisation. The tier-1 capital was a weak 8.6 per cent, while the overall capital adequacy ratio was 11.6 per cent. After infusion of Rs 3,000 crore from the government, this ratio could move up by 70 basis points and could just about facilitate a 11 per cent loan growth this financial year.

However, the number is very low and vulnerable to any negative surprise. “PNB’s tier-1 capital is a tad below its net NPA ratio of 9.2 per cent and the bank needs to improve this,” adds Ganapathy. He has a ‘sell’ rating on the PNB stock with a target price of Rs 56 a share, half its current market price of Rs 129.

The weakness in the scrip on Thursday can also be explained partly by its recently strong show. The stock had run up 24 per cent in the past one month, in anticipation of better days ahead.

PNB plans to focus on small-size loans in the micro, small and medium enterprises segment, agriculture and allied sectors and retail (individual loans). There are now 60 per cent of its loan book. It also plans to unlock value in some non-core assets and raise bonds to improve its capital position. In fact, the housing finance subsidiary will soon come out with an initial public offer (IPO) of equity.

However, as this IPO issue comprises entirely of new shares, PNB will not get any part of the funds raised. The IPO, however, could lead to some increase in its target price as analysts start ascribing value to its residual stake in the housing finance company. Overall, analysts believe, given the smaller size of most of its non-core  businesses, future stake sales might only lead to marginal gains in PNB's capital ratio. In this scenario, it could take some time to come out of the woods.