PNB has already wakened up to the realization that loans can be given much more prudently than earlier thought possible. It is quitting the rat race of growth for now, and trying to clean up its books. Reeling from bad loans in the power and infra sectors, India’s second largest public sector lender can no longer afford to hide behind the excuse that the root cause for their crisis is huge lending to the private power sector players on government’s behest for supposed nation building. Chairman KR Kamath and his core team is rolling up their sleeves and focusing on what matters most now - to rein in further slippages and maximise recovery efforts. But can PNB do an ICICI Bank in this regard? Only time will tell. PNB also has to start afresh on the crucial life insurance front through a JV with Metlife India, and the bank also needs to shore up its capital, by attracting up to Rs. 1250 crore from Government of India through a preferential issue.
Punjab National Bank (BSE: 532461, NSE: PNB) is rallying, together with the rest of the banks and financial stocks. The stock of the second-largest public sector lender by revenue has rallied from Rs. 659 during August end to Rs. 919.60 recently - which is almost 40% rise within 4 months flat.
And technical advisors in the market, who relies on nothing but technical indicators, are bullish on the PNB stock, as clearly there is a momentum play out there in the Indian market, buoyed further by a possible rate cut, an underperforming Chinese market, and the tiding over of US fiscal cliff.
But apart from such environmental factors and technicals, what is the ground situation at Punjab National Bank? For its long-term investors, it has been a grim story.
PNB needs to shore up its equity further, and the lender is expecting up to a Rs. 1250 crore equity infusion by the promoter, Government of India, on a preferential basis. The PNB management recently approved this move.
On the crucial subsidiary front of life insurance, where peer banks like SBI have made giant strides in recent years, PNB has to start afresh after nearly 3 years since parting ways with former overseas partner, Principal Financial Group. Recently, PNB obtained the last regulatory approval for picking up a 30% stake in Metlife India Insurance to start afresh, after almost 2 years after announcing the new JV.
And PNB is yet to recover back to its year-to-date high of Rs. 1091. The stock is way off from its 2-year high of Rs. 1237. And it looks like it will never scale its 3-year high of Rs. 1395 in the near term.
In other words, PNB stock has to appreciate by another 52% from this current ’high’ level for three-year old investments to reach a no-loss state i.e. if you don’t count the FD interest and don’t consider the opportunity cost.
And speaking about opportunity costs, a similar equity investment in HDFC Bank would have yielded a 50% return during these 3 years.
As an aside, the current ‘rally’ in public sector lenders are also an outcome of the P/BV valuations getting stretched beyond all norms at private sector lenders and market darlings like HDFC Bank. In simpler words, they can’t be jacked up further, at least in the near term.
But what on earth happened to the once high-flying Punjab National Bank during these past three years? Can this underperformance be attributed wholly to the infamous post-2008 global financial crisis and the resultant high-interest regime unleashed by RBI in India?
Rating agency Moody’s recently cut PNB’s Outlook to ‘Negative’ from the earlier ‘Stable‘ rating. It should come as no wonder as PNB’s Gross NPA stands at a whopping 4.66%, whereas its Tier-I Capital Adequacy Ratio stands at a troubling 8.72%.
PNB’s restructured loan portfolio too is on the rise. As the pressure on asset quality mounted, PNB lowered its provision coverage ratio over the past year. That compounded the problem, and the global rating agency has remarked that if monitorables like gross NPA, restructured portfolio, and low provisioning, deteriorate further, there would be further cut on the ratings.
Moody’s, on their part, doesn’t expect PNB’s situation to improve within the next 12-18 months.
In Q2, Punjab National Bank had recorded the highest jump in gross NPAs among all public sectors banks, by witnessing a spike of 60%.
What created this whole mess is anybody’s guess. And like a couple of its peers in the public and private space, PNB has already wakened up to the realization that loans can be given much more prudently than earlier thought possible.
To get out of this vicious cycle, PNB has no other way than the ICICI way. It has to stop chasing growth and get its house in order. In other words, clean up and consolidate its balance sheet, before it again gets on track with all other growth initiatives.
In fact, it seems that PNB has already started following this prudent track now. Recent interactions that research houses had with PNB management reveal that focus has shifted completely to rein in further slippages and maximise recovery efforts.
Of course, growth will have to be sacrificed when shifting the focus in such a fashion. Analysts tracking PNB have guided that credit growth will be muted at 15% levels for FY13 due to this balance sheet consolidation.
How effective will be PNB’s improved prudence at the loan sanctioning level? The bank claims that it has become extremely selective on sanctioning loans for infrastructure projects, with future sanctioning to the troubled sector granted only after the project developer has got all the regulatory clearances.
However, such steps concern only new loans, and is no solace to investors who are obviously troubled by the unhealthy state of the existing loan book at PNB. For example, in Q2, absolute GNPA accretion was at 40% QoQ while net NPA accretion was at 60% QoQ. And delinquency ratio at 6.1% has been at the highest level seen in the last 7-8 years in PNB. According to analysts, explanations provided by the management for this sort of dismal performance was not very convincing.
PNB’s exposure to infra sector is typically of large and complex deals, and as such carry much uncertainty. A typical example is the Delhi-Gurgaon e-Way where the project is a 3-way affair between the concessionaire (DGSCL), NHAI, and the lenders including IDFC, PNB, & BoI. Since the project has been stalled for considerable time now, Government is mulling the option of IDFC taking over 74% of the project as the promoter, which means the debt of PNB too may be converted to equity, and the lender will have to rely on toll collection to make good on its loan.
PNB has also been hit badly by the problems in the power sector, especially loans to power producers. It is one among the three lead banks who have lent considerably to power producers. PNB Chairman KR Kamath has recently admitted that there is real concern over the issue of power producer loans turning bad. Overall, private sector power producers have taken loans to the tune of Rs. 2.3 lakh crore from various banks.
Punjab National Bank (BSE: 532461, NSE: PNB) is rallying, together with the rest of the banks and financial stocks. The stock of the second-largest public sector lender by revenue has rallied from Rs. 659 during August end to Rs. 919.60 recently - which is almost 40% rise within 4 months flat.
And technical advisors in the market, who relies on nothing but technical indicators, are bullish on the PNB stock, as clearly there is a momentum play out there in the Indian market, buoyed further by a possible rate cut, an underperforming Chinese market, and the tiding over of US fiscal cliff.
But apart from such environmental factors and technicals, what is the ground situation at Punjab National Bank? For its long-term investors, it has been a grim story.
PNB needs to shore up its equity further, and the lender is expecting up to a Rs. 1250 crore equity infusion by the promoter, Government of India, on a preferential basis. The PNB management recently approved this move.
On the crucial subsidiary front of life insurance, where peer banks like SBI have made giant strides in recent years, PNB has to start afresh after nearly 3 years since parting ways with former overseas partner, Principal Financial Group. Recently, PNB obtained the last regulatory approval for picking up a 30% stake in Metlife India Insurance to start afresh, after almost 2 years after announcing the new JV.
And PNB is yet to recover back to its year-to-date high of Rs. 1091. The stock is way off from its 2-year high of Rs. 1237. And it looks like it will never scale its 3-year high of Rs. 1395 in the near term.
In other words, PNB stock has to appreciate by another 52% from this current ’high’ level for three-year old investments to reach a no-loss state i.e. if you don’t count the FD interest and don’t consider the opportunity cost.
And speaking about opportunity costs, a similar equity investment in HDFC Bank would have yielded a 50% return during these 3 years.
As an aside, the current ‘rally’ in public sector lenders are also an outcome of the P/BV valuations getting stretched beyond all norms at private sector lenders and market darlings like HDFC Bank. In simpler words, they can’t be jacked up further, at least in the near term.
But what on earth happened to the once high-flying Punjab National Bank during these past three years? Can this underperformance be attributed wholly to the infamous post-2008 global financial crisis and the resultant high-interest regime unleashed by RBI in India?
Rating agency Moody’s recently cut PNB’s Outlook to ‘Negative’ from the earlier ‘Stable‘ rating. It should come as no wonder as PNB’s Gross NPA stands at a whopping 4.66%, whereas its Tier-I Capital Adequacy Ratio stands at a troubling 8.72%.
PNB’s restructured loan portfolio too is on the rise. As the pressure on asset quality mounted, PNB lowered its provision coverage ratio over the past year. That compounded the problem, and the global rating agency has remarked that if monitorables like gross NPA, restructured portfolio, and low provisioning, deteriorate further, there would be further cut on the ratings.
Moody’s, on their part, doesn’t expect PNB’s situation to improve within the next 12-18 months.
In Q2, Punjab National Bank had recorded the highest jump in gross NPAs among all public sectors banks, by witnessing a spike of 60%.
What created this whole mess is anybody’s guess. And like a couple of its peers in the public and private space, PNB has already wakened up to the realization that loans can be given much more prudently than earlier thought possible.
To get out of this vicious cycle, PNB has no other way than the ICICI way. It has to stop chasing growth and get its house in order. In other words, clean up and consolidate its balance sheet, before it again gets on track with all other growth initiatives.
In fact, it seems that PNB has already started following this prudent track now. Recent interactions that research houses had with PNB management reveal that focus has shifted completely to rein in further slippages and maximise recovery efforts.
Of course, growth will have to be sacrificed when shifting the focus in such a fashion. Analysts tracking PNB have guided that credit growth will be muted at 15% levels for FY13 due to this balance sheet consolidation.
How effective will be PNB’s improved prudence at the loan sanctioning level? The bank claims that it has become extremely selective on sanctioning loans for infrastructure projects, with future sanctioning to the troubled sector granted only after the project developer has got all the regulatory clearances.
However, such steps concern only new loans, and is no solace to investors who are obviously troubled by the unhealthy state of the existing loan book at PNB. For example, in Q2, absolute GNPA accretion was at 40% QoQ while net NPA accretion was at 60% QoQ. And delinquency ratio at 6.1% has been at the highest level seen in the last 7-8 years in PNB. According to analysts, explanations provided by the management for this sort of dismal performance was not very convincing.
PNB’s exposure to infra sector is typically of large and complex deals, and as such carry much uncertainty. A typical example is the Delhi-Gurgaon e-Way where the project is a 3-way affair between the concessionaire (DGSCL), NHAI, and the lenders including IDFC, PNB, & BoI. Since the project has been stalled for considerable time now, Government is mulling the option of IDFC taking over 74% of the project as the promoter, which means the debt of PNB too may be converted to equity, and the lender will have to rely on toll collection to make good on its loan.
PNB has also been hit badly by the problems in the power sector, especially loans to power producers. It is one among the three lead banks who have lent considerably to power producers. PNB Chairman KR Kamath has recently admitted that there is real concern over the issue of power producer loans turning bad. Overall, private sector power producers have taken loans to the tune of Rs. 2.3 lakh crore from various banks.
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