News Analysis

PNB: No surprises on the asset quality front, but risks remain

Radhika Merwin | Updated on January 09, 2018 Published on August 02, 2017


No news on bad loans is good news for investors. The June quarter results of Punjab National Bank, appear to indicate just that. Marginal improvement in the bank’s core net interest income after a declining trend two quarters ago, has also found favour with investors. But given the sharp run up in price over the past year and uncertainty over the sustainability of its recent performance, investors should tread with caution. There are a few lingering concerns on the bank’s performance :

From about ₹42,200 crore in FY16 (when RBI’s AQR was implemented), slippages halved to ₹22,400 crore in FY17. In the June quarter, fresh slippages stood at ₹6,018 crore, down from ₹7,533 crore in the same quarter last year. But the slippages still remain elevated when compared to the past trend (before AQR); in FY15 slippages stood at around ₹15,600 crore. PNB’s gross non-performing assets (GNPAs) are still a steep 13.6 per cent of loans at about ₹57,700 crore as of June 2017. A large bad loan book is likely to keep provisioning requirement high, even in FY18.

After reporting a huge loss of around ₹4,000 crore in FY16, the bank ended FY17 in the black, with a profit of ₹1,325 crore. But while fall in bad loan provisioning aided earnings, weak core performance has been a concern. In fact, had it not been for the one-off adjustment in pension expenses to the tune of around ₹2,000 crore, the bank would have slipped into the red, reporting losses of about ₹700 crore for the FY17 fiscal. In the latest June quarter, too, the 12 per cent y-o-y growth in net profit was driven by robust growth in other income of 22 per cent, while net interest income growth remained subdued at 4 per cent.

Loan growth

While the bank’s weak core performance mirrors the overall lacklustre growth within the sector, it remains worrisome given the still high level of provisioning requirement. After growing 11.7 per cent in FY16, PNB’s domestic loans grew just 3 per cent in FY17. While this has inched up to 6.6 per cent in the June quarter, it still remains weak.

Expectations of a turnaround and seemingly lower asset quality pressure have driven the stock price of PNB over the past year. The stock can correct substantially if earnings performance disappoints in the coming quarters.

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