Elevated provisioning continues to weigh on PNB’s earnings

RBI dispensation on MTM losses, higher-than-expected growth in net interest income offer little respite

Punjab National Bank was among the five public sector banks that recently received capital from the Centre. True, large haircuts and higher provisioning on accounts under IBC and the RBI’s February circular forcing banks to accelerate the NPA recognition exercise, has led to steep losses for banks, leading to fresh infusion of capital by the Centre. But for PNB -- that was counted among the stronger banks last year -- to barely meet its Tier-I capital ratio requirement of 7 per cent in the March quarter had, in any case, been a cause for concern.

The latest June quarter results have only heightened the bank’s woes.

The pain in PNB that got accentuated in the March quarter with the RBI’s February circular on stressed assets, has showed no sign of letting up in the latest June quarter. After the bank’s disastrous performance in the March quarter when it posted a steep Rs 13,417-crore loss, the bank continues to be in the red. PNB reported a loss of Rs 940 crore in the June quarter, despite a somewhat good show on the core net interest income front and making use of the RBI’s dispensation on marked-to-market (MTM) losses on investments in government bonds. Still elevated provisioning on a huge bad loan book and incremental provisioning requirement on IBC cases, has weighed on the bank’s performance.

The bank’s Tier-I capital stood at just above the mandated 7 per cent requirement -- at 7.3 per cent as of June 2018. The Centre’s infusion of Rs 2,816 crore received in July, should offer some respite in the September quarter provided, of course, that there is some let-up in the bank’s asset quality.

Persisting bad loan woes

For PNB, a large stressed asset book, incremental provisioning requirement and a weak balance sheet, have been a key overhang over the past two to three years. The break-out of the massive Nirav Modi scam and the RBI’s February circular on stressed assets only made matters worse.

The bank’s NPA provisioning ballooned to Rs 16,200 crore in the March quarter, owing to huge slippages as a fallout of the RBI’s diktat. In the latest June quarter, while provisioning has fallen to Rs 4,982 crore, it is still a worrisome figure, going by the past trend. The bank making use of the RBI’s dispensation on MTM losses on investments in government bonds has helped to some extent in the June quarter. PNB still has MTM losses to the tune of Rs 1,200 crore spread over the ensuing quarters that will impact earnings.

PNB’s gross non-performing assets ratio is now a steep 18.26 per cent of loans. With a huge bad loan book of nearly Rs 83,000 crore, provisioning will continue to remain elevated, even if slippages moderate hereon.

Deteriorating financials

Despite the Centre’s tidy capital infusion of Rs 5,473 crore into PNB in FY18, PNB’s total capital adequacy ratio came down to 9.2 per cent in the March quarter. It needs to be seen if the Centre’s recent capital infusion will be adequate for the bank to meet its capital requirement.

PNB’s core performance has been nothing to write home about. While the bank’s core net interest income grew by a surprisingly notable 21.7 per cent YoY in the latest June quarter, it was on a low base (last year in the corresponding quarter net interest income grew by just 4 per cent) and possibly aided by some one-off recoveries. Hence, sustainability of the core performance will be critical. In any case, elevated provisioning could continue to play spoilsport, as it has in the June quarter.

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