Bad Loans Moderate At PNB, But Profitability Weak

At first glance, Punjab National Bank’s lower slippages, fall in provisioning, and improvement in capital adequacy ratio in the latest December quarter lend comfort, particularly after the tumultuous performance in the September quarter.

But a huge bad loan book of ₹77,000 crore, substantial write-offs, and weak core performance suggest that earnings may continue to be under pressure with no sharp recovery in the near term.

After reporting a loss of ₹4,532 crore in the September quarter, the modest profit of ₹247 crore appeases optically. But given the size of PNB and its quarterly run-rate of more than ₹1,000 crore in net profit in the past (before FY15 when asset quality started to deteriorate sharply), the earnings picture is not too encouraging.

Also, the improvement in the bank’s Tier I capital ratio has been due to the Centre’s capital infusion of ₹8,247 crore in FY19, and the notable reduction in the bank’s risk-weighted assets. Sharp slippages can impact earnings and eat into capital in the coming quarters, which, in turn, will take a toll on an already modest loan growth.

Easing up capital

Despite the Centre’s tidy capital infusion of ₹5,473 crore in FY18, the bank’s Tier I capital had stood just above the mandated 7 per cent requirement in the June quarter, owing to the sharp rise in provisioning in the March quarter following the RBI’s February circular on stressed assets.

Many PSBs, including PNB, have lowered the risk profile of their assets to ease up capital, which, to some extent, has helped shore up Tier I capital. Capital ratios are determined with risk-weighted assets (RWA) as denominator. Risk weights are applied to each type of loan based on the possible risk of default to arrive at RWA.

For PNB, its RWA has fallen from ₹4.5 lakh crore in the March 2018 quarter to around ₹4 lakh crore in the December quarter, a fall of 11 per cent.

This, along with the Centre infusing capital three times this fiscal totalling ₹8,247 crore, has helped PNB improve its Tier I capital to 8.25 per cent in the latest December quarter. While reducing the underlying risk is a prudent way of conserving capital, the impact on credit growth needs to be monitored. Overall advances have remained flat from the March 2018 quarter and domestic advances have grown by a modest 6 per cent between March and December 2018.

NPA still large

For PNB, which was already riddled with challenges, the break-out of the Nirav Modi scam, and the RBI’s February diktat, made matters worse in the current fiscal. After the bank’s NPA provisioning shot up to ₹16,200 crore in the March quarter, it remained elevated at ₹7,733 crore in the previous September quarter. The provisioning, however, has substantially fallen to ₹2,566 crore in the December quarter, which is a positive. The bank’s GNPA ratio has also fallen from 17.1 per cent in the September quarter to 16.3 per cent in the December quarter. However, there several points to note.

For one, while there has been notable recoveries in the December quarter, there have also been significant write-offs that led to gross NPAs moderating. Write-off is a process where banks stop recording the bad loans in the books and take a hit on their profits by fully providing for such loans. From ₹2,648 crore in the June quarter, write-offs have moved up to ₹3,082 crore in the December quarter. Additions to bad loans are still high at nearly ₹4,000 crore in the December quarter.

With a huge bad loan book of about ₹77,000 crore, provisioning will continue to remain elevated, even if slippages moderate. PNB’s core performance also has been modest. The bank’s core net interest income grew by 7.6 per cent year-on-year in the latest December quarter. Weak core profitability makes the bank vulnerable to sharp slippages and rise in provisioning in the coming quarters.