We have heard of state-run banks setting up war rooms to battle bad loans, but fraud-hit Punjab National Bank (PNB) has gone one step further. Perhaps to cultivate competitive spirit among employees or to reward performers or both, the country’s second largest Public Sector Bank (PSB), is recognising ‘Recovery Champions,’ i.e., whoever brings in more will be appropriately rewarded. And the efforts seem to be paying off.
During the first nine months ended December 2018, PNB’s gross loan recoveries (including upgradations) stood at a mighty Rs 16,600 crore. In fact, in third quarter alone, recoveries stood at Rs 2,960 crore, higher than the past six quarters’ recovery run rate of Rs 2,000 crore, in turn helping the bank reduce gross NPAs from 18.26 per cent of total advances as on March 2018 to 16.33 per cent as on December 2018.
This, coupled with lower slippages and reduced provisioning, allowed the bank to turn the corner registering a modest net profit of Rs 247 crore during the just-concluded quarter. But is it perched firmly on the profitability path? There are no easy answers. Going by the numbers publicly disclosed, though slippages were lower at sub-Rs 4,000 crore and the asset quality appears better-than-expected, analysts are uncertain about continuity of profits. For, the bank’s loan growth dipped 4 per cent over last year, which may not be as alarming as international advances that plunged more than 60 per cent over last, thanks to the $2-billion Nirav Modi fraud that took a toll on its overseas business.
Worse, its deposit growth remained flat during the December quarter and could continue to be under stress, while the bank’s core net interest income grew at a modest 7.6 per cent year-on-year in the latest December quarter. Analysts reckon weak core profitability puts the bank under the vulnerable zone and if slippages rise, leading to higher provisioning, that could spark enough trouble for the bank, which will soon be consigned to the third spot among PSBs (once the three-way merger among Bank of Baroda, Dena Bank and Vijaya Bank pulls through).
For its part, the management reiterated its commitment to focus on loan recoveries, and pursue the sale of its non-core assets (on the line of stake sale in PNB Housing Finance that fetched it a neat Rs 1,231 crore) and conserve as much capital. Thanks to the generous Rs 8,247 crore cheque from the government so far in FY19, the bank’s capital adequacy ratio improved and with the conscious reduction in its risk-weighted assets (from Rs 4.5 lakh crore as on March, 2018 to about Rs 4 lakh crore as on December, 2018), PNB’s tier 1 capital is just above the RBI-mandated 7 per cent norm. And as brokerages underscore, a weak earnings profile, structural operational issues and a diluted franchise render the bank a structurally challenging investment proposition, at least in the near term.