The country’s second-largest public sector bank has now officially turned into a pariah on the Street. After having rung the alarm bells early this year following a massive Rs.14,357 crore fraud perpetrated by the now absconding jeweller Nirav Modi, a majority of analysts assigned a “sell” rating only after the bank declared its disastrous fourth-quarter (Q4) results on May 15. Among the analysts tracking the stock, which has more than halved from Rs.185 in January to Rs.74 level, 15 have a “hold” rating, while 11 have a “sell” rating, according to Bloomberg. Hemendra Hazari, an independent market analyst, is surprised that the market took so long to react on the stock. “The day the bank revealed the fraud, it was always going to be a write-off. It beats me what the analysts were expecting from the bank,” says Hazari, who does not see the bank’s woes ending anytime soon.
The bank earned the dubious distinction of becoming the only Indian bank in history to post a massive quarterly loss of Rs.13,416.91 crore ($2 billion), compounded by a three-fold surge in provisions towards bad loans. For FY18, the bank’s standalone net loss stood at Rs.12,130 crore against a net profit of Rs.1,325 crore in FY17. That the pain is far from over is evident by the fact that the bank has only made a part provision of Rs.7,178.42 crore in Q4 for the fraud and will provide for the balance Rs.7,178.42 crore in the first three quarters of the current fiscal. Though the Reserve Bank of India had allowed PNB to make provisions at the rate of 25% and provide the balance over the subsequent three quarters, the bank management pro-actively decided to go in for 50% provisioning, in a bid to clean up the balance sheet to the maximum extent possible in FY18 itself.
Under ordinary circumstance, it would have inspired confidence among analysts that the worst is over. But unfortunately that’s not the case with PNB whose net non-performing loans at over Rs.48,000 crore is much more than its net worth of Rs.41,000 crore. Jobin Jacob, associate director, Fitch Ratings fears that the worst is in store. Fitch Ratings had in April downgraded the viability rating of the bank to 'BB-' and put it on rating watch. The agency had stated that the downgrade also reflected the bank's risk controls, which are weaker than what was previously believed to be since the fraud went undetected for several years. “We believe there is more to what meets the eye, and don’t rule out the possibility of a further downgrade,” Jacob told Outlook Business. A further downgrade will take the bank’s rating to B+, which denotes highly speculative fundamental category. “While we acknowledge the fact that it’s government-owned, we are worried about slippages in the restructured piece and are trying to understand how much more pain is in store,” adds Jacob.
If one takes into account the impact of the high provisions, then things are clearly looking gloomy for PNB. The bank's capital adequacy ratio (CAR) has dipped to 9.2%, significantly below the 11.5% prescribed by the Basel-III norms. According to Credit Suisse, capital depletion will lead to loan book contraction as the bank could incur losses in FY19 on residual fraud provisions. The foreign brokerage house believes the bank might need to contract its balance sheet in a bid to conserve capital.
There is also the risk of the bank coming under the RBI’s Prompt Corrective Action (PCA) plan, which places curbs on sanctioning of fresh loans and payouts. A bank comes under the PCA when the final threshold is triggered of net NPA touching 12%, and PNB is inching closer to the final threshold as its gross NPA have surged to 18.38% from 12.21% sequentially, and so has the net NPA to 11.24% from 7.55%. Currently, of the 21 state-owned banks, 11 are already under the PCA as their bad loans are over 6%. But the bigger worry is that unless there is a significant turnaround in the economy, merely putting a bank under PCA won’t help since the net non-performing asset, as a percentage of advances, will not fall. And if indeed there are curbs on the growing the loan book, PNB’s situation will only be aggravated further.
Now that the Rs.5,400 crore capital infusion by the government last fiscal has fallen short, the bank would have to knock on the doors of the government again. With the government grappling with a tight fisc, there is hardly any room for the exchequer to be charitable. Though there has been a clamour for consolidation in the public banking space, driven by big public sector banks such as SBI and PNB, now with SBI already having merged its four associate subsidiaries, the talk was always around PNB taking the lead. But the scam has changed the prospect overnight. “Who is going to bail out PNB? Clearly, it can’t be the SBI, which has its task cut out with the recent merger. No other public sector can absorb PNB, so the only option is that the government has to be pump in capital. Ultimately, it is the de facto promoter,” says Hazari.
Though PNB holds stakes in its housing finance arm and an insurance venture, it’s not yet clear whether the government or the RBI would nudge the bank to offload its stakes. In fact, the recent battering has brought down PNB’s market cap (Rs.20,800 crore) a tad lower than PNB Housing Finance (Rs.20,900 crore). Among institutions, MFs hold 8.18% stake, with the biggest chunk at 3.89% being held by the Prashant Jain-managed HDFC Prudence Fund. In fact, the fund had increased its holding from 3.08% in March 2017 to 4.21% by December 2017, and post the fraud, managed to dump some of its holding. Among insurers, LIC holds 12.24%.
For now analysts would rather wait and watch. Kunal Shah of Edelweiss Securities believes given the structural issues around PNB, it’s better to be avoided. “We believe governance issues, operational challenges, uncertain business prospects and diluted franchise makes it a dud investment proposition,” mentions Shah in his report. Though at its current price of Rs.75, the stock is trading at 0.6x one-year forward P/B, it’s unlikely that the Street is going to rerate the stock in a hurry.