Punjab National Bank's FY20 aim: Find a page in investors' good books

Nearly a year has passed since the Nirav Modi scam hit Punjab National Bank (PNB), now the third-largest public sector bank (PSB) after the merger of Bank of Baroda with Vijaya Bank and Dena Bank. 

However, as a result of the scam, PNB is back to square one in terms of capital adequacy. With common tier-1 capital at 6.2 per cent, it is weak for supporting growth or cleaning up the book further. 

The question is whether the bank — after three rounds of fund infusion by the government — will approach it once again, or raise money on its own this time.

If the bank opts for the former, it would be the only large PSB to lack the capability to stand on its own. The Street, however, is far from convinced that there aren’t any more skeletons in PNB’s loan book, despite valuations being at a three-year low of 0.8 times its FY20 book.

Therefore, FY20 will be a vital year for the bank. Operationally, there has been some improvement, most of which was seen in the March quarter (Q4). Net interest income (NII) grew 37 per cent year-on-year (YoY) to Rs 4,200 crore in Q4, but was wiped out by significant provisioning of Rs 10,071 crore. 

It was another quarter of steep loss, at about Rs 4,750 crore. Divergence in asset quality pointed out by the regulator (Rs 3,770 crore) also kept provisioning elevated. Positively, the slippages ratio (accretion of fresh bad loans) nearly halved to 5.6 per cent, from 10.6 per cent in FY18. 

However, analysts at Jefferies are concerned over the quality of slippages. With just 20 per cent attributable to the troubled IL&FS account, Jefferies feels slippages outside the reported stressed book implies the balance sheet remains weak and disappointing. The high level of write-offs — Rs 12,250 crore in FY19 versus Rs 7,400 crore in the last fiscal — has displeased investors. 

That said, PNB remains an important franchise, especially to spearhead consolidation among PSBs. Sunil Mehta, managing director of PNB, has time till September (before he steps down) to win back lost investor faith, raise capital, and most importantly, get PNB back in the driver’s seat in the merger process.