While most private banks have managed to grow faster than the industry and keep bad loans under check, the performance of public sector banks still appear dodgy. Punjab National Bank (PNB), which declared its results on Friday, saw its asset quality worsen.
Trouble all around Its stressed assets, at about 16 per cent of loans, are one of the highest amongst public sector banks. PNB’s net profit declined 62 per cent in the March 2015 quarter, despite a tax write-back of ₹938 crore. The bank’s core net interest income fell 5 per cent during the quarter, on the back of a 40-basis point drop in net interest margin.
The bank’s domestic loan book grew about 6 per cent over last year, far lower than that of the industry, which is itself a sombre 10 per cent.
While the high-yielding retail loan book clocked a healthier 24 per cent growth, it constitutes only 14 per cent of total loans and has not helped shore up margins.
During the March quarter, the bank’s provisions for bad loans rose a steep 87 per cent.
The gross non-performing assets at 5.97 per cent of loans during the December quarter, already among the highest in public sector banks, rose further in the March quarter to 6.55 per cent.
What’s more, PNB’s pile of restructured loans, at about 10 per cent of loans, is one of the highest amongst its peers. The bank’s bad loan worries are, thus, far from over.
Returns hit Muted loan growth, declining margins and deteriorating asset quality have weighed on the bank’s profitability. PNB’s return on assets slipped to 0.2 per cent during the March quarter, while its return on equity languished at 3 per cent.
Given the bank’s high leverage of about 15 per cent (ratio of assets to net worth), the returns hardly justify the risk. The bank’s Tier I capital rose to 9.3 per cent in the Marchquarter from 8.5 per cent in the December quarter, thanks to the capital infusion of ₹870 crore by the government and the bank raising ₹1,500 crore through issue of Basel-III compliant Additional Tier 1 (AT-1) bonds.
Given that the government has adopted a new criterion where only banks that are more efficient would be rewarded with additional capital, the bank’s performance in the ensuing quarters will need watching.
While banks are allowed to issue AT-1 bonds under Basel-III, given the riskier nature of such instruments, they carry higher coupons compared to conventional instruments.