Still under water, PNB disappoints Street as credit cost weighs on earnings

In contrast to the positive asset quality trend shown by many public-sector banks in their September 2018 quarter (Q2) results, so far, Punjab National Bank (PNB) disappointed the Street. With the bank continuing to report elevated provisioning in Q2, it led to a net loss of Rs 45.3 billion. This was the third consecutive quarter of loss. The numbers were also worse than a loss of Rs 13.5 billion estimated by analysts as per Bloomberg. Not surprisingly then, the PNB stock, which was trading in positive territory initially on Friday on hopes of the fraud-hit bank posting a similar trend as its peers, plunged post results. It fell seven per cent to close at Rs 69.05, even as the S&P BSE Sensex was up 1.7 per cent. 

In Q2, provisioning and contingencies shot up by 69 per cent sequentially and four times year-on-year, keeping credit cost higher at 6.5 per cent versus 4.4 per cent in June 2018 and 2.5 per cent a year back. As per the Reserve Bank of India's dispensations, banks were allowed to spread their provision requirements over a few quarters. Of the provisions seen in Q2, about 47 per cent was on account of past quarters. While PNB provided Rs 33 billion towards the Nirav Modi fraud reported in the March 2018 quarter, Rs 7.3 billion was for mark-to-market losses for the December 2017 to June 2018 quarters. 

This provisioning pain would continue hurting the bank in coming quarters as well, as PNB would have to provide Rs 20.2 billion (equivalent to 71 per cent of pre-operating profit in Q2) towards the fraud in the December 2018 quarter and another Rs 4.84 billion for mark-to-market losses over the next two quarters.

Yet, there aren't any indications of a significant improvement in asset quality. Fresh slippages, or loans turning bad, at Rs 56.4 billion, though down 23.3 per cent sequentially, were at elevated levels. Also, a 51-58 per cent sequential decline in bad loan recoveries and upgradations (bad loan becoming standard) indicates the NPA ageing issues for PNB. For banks, as NPAs turn older, a higher provision is required. Positively, a sharp 34 per cent rise in write offs helped report a two per cent sequential fall in gross non-performing assets (NPAs), or bad loans, to Rs 812.5 billion in Q2. Gross NPAs as a percentage of gross advances came down from 18.3 per cent as of the June 2018 quarter. However, at 17.2 per cent as of the September 2018 quarter, they were still very high.

Overall, analysts expect the credit cost of the bank to remain high in the near term, weighing on earnings as well as its stock price.    

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