Indian public sector banks (PSBs) are now facing major headwinds and Punjab National Bank (PNB), the second largest public sector bank, is no exception. With several sectors—steel, power generation and distribution, telecom, etc.— still under stress, loan delinquencies and the resulting large number of nonperforming assets (NPA) are the major problem of PSBs. And the gross and net NPAs of PNB, as on September 2017, stood at a whopping 13.31% and 8.44% respectively.
Despite this, analysts are getting bullish on PNB because, with the quantum of new slippages in loan repayments coming down, there’s light at the end of the tunnel. Though slowly, the loan books are growing and this is bringing down the NPAs in percentage terms. To illustrate, the gross and net NPAs fell 35 and 23 basis points respectively, quarter on quarter, in the second quarter of 2017-18. With PNB’s loan book expected to grow 8-9% in the third quarter, analysts expect that fall in NPAs will continue in the upcoming quarters as well.
The new capital adequacy ratio (CAR) proposed under the Basel-III norms is the next big headwind facing PSBs. Huge write-downs—provisioning for NPAs—in the recent quarters have eroded the capital base of several PSBs, sending their CAR below the Basel-III norms—banks are expected to achieve Tier-1 CAR of 7% and total CAR of 11.5% by March 2019. However, with Tier-1 CAR of 8.9% and total CAR of 11.5% (as on September 2017), PNB is comfortably placed. With the generating profits again, it will be able to rebuild CAR slowly.
In October 2017, government promised to recapitalise PSBs to the tune of Rs 2.11 lakh crore over the next two years, leading to a jump in the PSB stocks. This recapitalisation will be done with the help of ‘recapitalisation bonds’ to the tune of Rs 1.35 lakh crore and the government will dilute its stake in PSBs to provide the remaining funds. Since the government has already stated that these capital injections are aimed at supporting lending growth, probability of big and reasonably healthy banks like PNB cornering most of the funds is high. The government’s holding in PNB is now placed at 57% and, therefore, there’s also the scope for raising capital from the market without the government’s stake in the bank falling below the 51% limit.
With the stabilsing NPAs and the expected improvement in its loan growth, analysts are hopeful that PNB’s return on net worth should go back to around 16% by 2019-20 from the current 10%, and this can trigger a re-rating for the counter.
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Performance of PNB compared with the Sensex. stock price and index values normalised to a base of 100.
Source: ETIG database & Bloomberg.