Five years after India’s biggest bank fraud, is PNB finally turning the corner?

A little under five years back, in February 2018 to be precise, state-owned Punjab National Bank (PNB) found itself in the middle of a Rs 14,000 crore fraud committed by diamond merchant Nirav Modi and his uncle Mehul Choksi.

And as if that was not enough, PNB was one of the lenders at the forefront of the country’s bad loans mess that had engulfed the banking industry.

In fact, as of the quarter ended March 2018, PNB’s non-performing assets as a percentage of total loans were at 18.38% and the lender went into the red.

Little wonder, then, that PNB’s shares fell from Rs 180 apiece towards the end of January 2018 to Rs 59.7. And in the wake of the stock market rout following the national lockdown of March 2020, PNB dropped to as low as Rs 26.6 per share levels.

But two-and-a-half years on, the counter is riding high, and an international brokerage has just gone overweight on it—rare for a public-sector lender in India.

JP Morgan has said in a recent note it sees a 26% upside in the counter from its present levels. JP Morgan has upgraded PNB from a long standing 'underweight' to 'overweight' stance. The brokerage has also raised the target price on the stock to Rs 72 per share.

JP Morgan has said that the bank’s Q2 shows that net slippages have got into negative territory and recovery momentum is outpacing new NPA creation. Also, there is minimal stress in corporate loans. Provisions are largely related to back book (net NPA 3.8%, restructured 1.7%), which are higher than State Bank of India and Bank of Baroda and the market will likely look through it via a one-time book value adjustment

"Capital and liquidity are reasonably comfortable with Common Equity Tier 1 capital (CET-1) at 10.9% and liquidity coverage ratio at 160% in an environment of tighter deposits at private banks," the brokerage said.

It also said that the stock has seen a re-rating-led outperformance recently and noted that it had risen 44% in three months against the Bank Nifty index’s 8% rise. “We believe that, with limited new stress formation and system growth outlook improving, this trend could continue in the near term,” JP Morgan said.

Not completely out of the woods

But this does not mean that PNB is totally out of the woods yet. In fact, JP Morgan itself says that going forward, earnings will remain under pressure in 2023-24 as the bank catches up on back book provisioning. This keeps FY24 estimate broadly unchanged. However, with limited new stress formation and system growth itself picking up, it sees further scope of re-rating at PNB, Moneycontrol reported, citing the JP Morgan note.

In Q2 FY23, PNB posted a 63% decline in net profit to Rs 411.3 crore from Rs 1,105.2 crore in the same quarter last year. Net interest income (NII), however, jumped by 30.2% to Rs 8,271 crore from Rs 6,352.8 crore a year earlier. The bank's provisions for bad loans climbed to Rs 3,555.98 crore from Rs 2,692.74 crore a year ago. Its gross NPAs declined to 10.48% of the gross advances from 13.36% in Q2 FY22.

Yet, despite these mixed numbers, aa is not the only brokerage that has given a thumbs up to the stock. Analysts say PNB’s share price is trading near its first resistance level of Rs 57 and that a decisive breach above this mark could trigger a further rally to Rs 80-100.

These analyst reports come even as the bank has recently issued and allotted Basel III-compliant Tier-II capital bonds at a coupon rate of 7.89% per annum aggregating to Rs 4,000 crore on a private placement basis.

Moreover, in November, PNB received approval for divestment of its entire or part stake in UTI Asset Management Company in single or multiple tranches. The divestment will be done for realisation of gain on investment. The timeline, percentage of shareholding for divestment, and value of divestment are yet to be finalised.

Further, following the Rs 4,000 crore raise, the bank is raising more capital of up to Rs 1,000 crore through additional tier-1 (AT1) bonds.

Citing PNB managing director and chief executive officer A Goel, Business Standard reported that while capital adequacy is above regulatory norms, the bank would like to maintain an adequate capital pool to support credit growth.

PNB’s capital adequacy ratio (CAR) stood at 14.74% with Common Equity tier-1 (CET-1) of 10.88% and AT1 ratio of 1.32% at the end of September 2022. The tier-II level was 2.54%.

The bank already has board approval for raising Rs 12,000 crore. Of this, Rs 5,500 crore is tier-1 capital and Rs 6,500 crore is tier-II capital, Goel said. Out of the Rs 5,500 crore, it raised about Rs 2,658 crore of tier-1 capital in the last quarter ended September 2022.

The retained profits in FY23 would get added to capital (equity). This will improve CAR further. The bank has estimated 9-10% growth in retained profits.

PNB’s gross advances increased 12.84% year-on-year (YoY) to Rs 8.3 trillion at the end of September 2022. It has guided for credit growth of 12-13% this financial year.

The bank has also managed to reign in its bad debt and said in July that it would be in a position to recover Rs 32,000 crore of bad loans in the current financial year.

According to a Mint report citing Goel, to achieve its loan recovery target, PNB has formed a team of about 300 officials who will be monitoring all NPA accounts. It is attempting to boost bad loan recoveries and is monitoring all accounts including those on which proceedings under the SARFAESI Act or National Company Law Tribunal are underway. It is also looking to transfer Rs 2,486 crore of bad loans to the National Asset Reconstruction Company Ltd.

The results are showing. The bank’s net NPAs fell to 3.80% in the July-September quarter from 5.49% a year earlier and 4.8% in the March quarter. Gross NPAs reduced to 10.48% at the end of the September quarter from 13.63% a year ago.

Indeed, PNB has made an effort to turn its fortunes around. Moreover, it has now also received a thumbs up from analysts. Will the good times last? That, only time will tell.