Merger woes: Why PNB Q2 performance carries tell-tale signs of more pain ahead

The troubles for state-owned Punjab National Bank that began much before the ₹14,000-crore Nirav Modi scam in 2018have only worsened with the merger of Oriental Bank of Commerce and United Bank this fiscal. While the idea of the merger stood on weak ground right from the start, the latest September quarter results underpin the pain ahead for the merged entity.

Weak core performance, sizeable SMA2 book (overdue by 61-90 days), significant value of loans under moratorium, poor return ratios, and need for steady capital infusion point to the rocky road ahead for the bank.

Asset quality risks

While the bank’s GNPA ratio fell marginally to 13.4 per cent in the September quarter (from 14.1 per cent in June quarter), it has been mainly due to the asset quality standstill benefit (Supreme Court order). For the entire banking sector, the huge uncertainty over asset quality in the second half of the fiscal, is a lingering concern. For PNB, in particular, there are several aspects that heighten the risk further.

One, PNB’s bad loan troubles began much before the RBI’s asset quality review in December 2015, owing to its exposure to stressed sectors. The bank continues to have significant exposure to stressed sectors such as telecom and energy, and also sensitive sectors such as commercial real estate and NBFCs. As of September, PNB had outstanding exposure (funded) of about ₹16,700 crore and ₹44,600 crore to the telecom and energy sectors, respectively, with NPAs of 25-27 per cent.

The NPA levels for the bank in certain other sectors, too, remain high. For instance, NPAs in agriculture stood at 14 per cent, while delinquency ratios in textiles (22 per cent), metals (31 per cent) and education loans (11 per cent) also remain elevated.

Two, the bank has a sizeable ₹19,000 crore of SMA 2 loan book as of September, of which, ₹6,668 crore pertains to MSMEs, where the one-time restructuring option is available. For the balance, it needs to be seen which are the accounts that are eligible for the RBI’s restructuring scheme.

Three, the value of loans under moratorium as of September, are increasing the possibility of rise in slippages in the coming quarters. Overall loans under moratorium stood at 39 per cent as of September.

Lastly, PNB has a huge bad loan book of about ₹96,000 crore and, hence, provisioning will continue to remain elevated. Significant recoveries will be critical to cushion earnings in the second half. But given the pandemic-led disruption in recoveries and IBC resolutions, the pain could extend for some time for PNB, saddled with the burden of merger with two weak banks.

Weak core earnings

PNB’s weak core performance also offers little comfort. In the September quarter, PNB saw a muted 1 per cent y-o-y growth in deposits (marginal fall sequentially), with advances flat over the previous year. While corporate loans shrunk by 5 per cent y-o-y, retail loans grew by a meagre 4 per cent in the September quarter. Until loan growth recovers significantly – which appears challenging, given the capital pressure – core earnings could remain under pressure.

A higher provisioning in the coming quarters can, hence, erode overall profit and capital. The bank holds Covid provisions to the tune of ₹995 crore as of September, which may not be sufficient to absorb future losses.

The Centre infused a tidy ₹30,000 crore into PNB in FY19 and FY20 alone. The merged entity will require further infusion this fiscal. The management is looking to raise about ₹7,000 crore in December through QIP. How far the bank is able to strengthen its capital base needs to be seen and will be critical.