PNB: explosion of bad loans bares ugly underbelly of public sector banking

Punjab National Bank (PNB), the fourth largest state-owned bank by assets, announced December quarter earnings on Tuesday that highlighted the huge problem of troubled loans haunting public sector banks, sending an unambiguous message that despite the rosy GDP numbers, what lurks beneath is ugly.

Gross non-performing assets touched 8.5% of the loan book, jumping by more than half from September-end, as a result of a review of loans initiated by the Reserve Bank of India (RBI) as part of a cleaning-up exercise. Stressed assets, which include bad loans plus restructured assets, increased to 17.6%.

Fresh slippages or loans turning sour almost tripled to Rs.13,482 crore compared with the September quarter. The infrastructure, metal and steel sectors contributed the most to the bad loans. What’s more, the quantum of troubled assets now exceeds PNB’s net worth.

While it’s good that the bad assets, hitherto hidden, are now seeing the light of day, the bad loan problem is expected to get worse. This is because PNB has only recognized half of the stress on its books. “The surgery is not over yet, we have to clean up thoroughly,” Usha Ananthasubramanian, managing director and CEO of PNB, told reporters at a press conference.

Analysts say the PNB management has guided for a similar level of addition to bad loans in the March quarter as well. That would mean a further reduction in book value, after adjusting for bad loans. Even after Tuesday’s 7% slide in the stock price, the shares trade at 0.4 times projected book value for FY17. Even that low valuation now seems excessive.

Another worry is these troubled loans do not take into account assets worth around Rs.14,000 crore, of which half have been classified under the 5/25 scheme and the other half under strategic debt restructuring (SDR) since the beginning of FY16. Under the 5/25 scheme, banks can extend loan repayment periods to 25 years, with an option of refinancing every five years. SDR gives greater control over defaulting firms, by converting debt into equity. But both these schemes have been criticized as merely kicking the can of bad loans down the road.

The sharp increase in bad loans led to a doubling of provisions, eroding profits. The bank reported profit after tax of Rs.51 crore. But that’s only on account of a tax write-back of Rs.909 crore. Without that write-back, it would have reported a loss of Rs.858 crore.

Analysts also point out that while the bank has a capital adequacy ratio of 11.25%, if adjusted for impairment, it would fall well below RBI’s required levels. This means PNB will need capital infusion from the government in the coming quarters to stay afloat, said an analyst from a leading brokerage firm.

Additionally, the problem of stressed assets is not just hurting PNB. Allahabad Bank shares also slumped on Tuesday after December quarter earnings showed a steep increase in bad loans. Dena Bank’s bad loans also shot up.

Overall, the Nifty PSU Bank index declined 3.7% on Tuesday. Other large public sector banks, such as Bank of Baroda and State Bank of India, which are going to announce earnings soon, are likely to face a similar explosion of bad loans. The pain is far from over for Indian banking.