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Danger signs lurking despite Punjab National Bank Q1 profit

While the bank's deposit growth is under pressure, credit offtake has not picked up pace with weak earnings, structural operational issues and fresh slippages threat continuing to cast dark cloud.

Published: 31st July 2019 08:24 AM  |   Last Updated: 31st July 2019 08:24 AM   |  A+A-

The logo of Punjab National Bank is seen on the facade of its office in Mumbai

The logo of Punjab National Bank is seen on the facade of its office in Mumbai (Photo | Reuters)

Express News Service

State-run Punjab National Bank (PNB) may have pulled a rabbit out its hat springing a surprise profit in the first quarter this fiscal, but analysts see danger signs lurking around, implying that the worst may not be over yet.

For one, deposits growth is under pressure, and credit offtake hasn’t picked up its full pace. Weak earnings, structural operational issues and the threat of fresh slippages continue to cast dark clouds around the bank’s performance. The management, however, maintained that the bank’s asset quality has recuperated, recoveries are on track and that it could rake in Rs 20,000 crore or more this fiscal. The state-run bank also noted that monetisation of non-core assets will likely to bump up its total income in the coming quarters.

For instance, proceeds from the sale of non-financial non-core assets are pegged at Rs 1,000 crore and financial non-core assets at Rs 4,000 crore, according to PNB. In FY20, it plans to boost capital by Rs 10,000 crore and contain credit costs below 3 per cent.

As if in lockstep, slippages were restricted at Rs 5,500 crore in the just-concluded quarter and though the exposure under special mention accounts-2 is around Rs 6,000 crore, slippages are likely to be limited to 10 per cent, indicating that the current quarter is unlikely to throw up unexpected shocks. Encouragingly, power sector stress has already been recognised and largely provided for, while the bank’s Rs 1,800-crore exposure to grounded Jet Airways Ltd continues to be standard.

Yet, exercising prudence, PNB has provided for 50 per cent of the overall exposure. Other troublemakers like the Infrastructure Leasing & Financial Services (IL&FS) account, which chiefly contributed to slippages in the June quarter, may have spillover affects, which PNB hopes will be rather controlled.

That said, given the softening demand and subdued business momentum, besides PNB’s weakening loan growth, brokerages anticipate that it could be a tightrope walk for the bank. During the quarter ended June, PNB’s loan growth contracted 8 per cent over the previous quarter, mainly due to a 7.7 per cent dip in domestic advances, while overseas advances remained flat.

“We believe operational issues that the bank is facing will continue to pose a challenge and the road to recovery will be arduous,” noted Edelweiss Securities.

Though the bank made provisions to the freshly discovered fraud in the power and steel sector account in Q1, further provisioning will have to be made in accordance with the RBI guidelines and could keep credit costs elevated. “We believe challenges and uncertainties far outweigh the combination of PNB’s undemanding valuation, subsidiary value and liability franchise. Limited visibility on structural drivers makes it an unpredictable investment story. Furthermore, merger-related uncertainty continues to be an overhang,” Edelweiss noted.

Asset quality has recuperated: PNB

Weak earnings, structural operational issues and the threat of fresh slippages continue to cast dark clouds around PNB’s performance. The management, however, maintained that its asset quality has recuperated, recoveries are on track and that it could rake in Rs 20,000 crore or more this fiscal. The monetisation of non-core assets will likely to bump up its total income in future

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