 "Reading the tea leaves on PNB earnings: Modi magic not working yet on corporates")
Government-owned Punjab National Bank (PNB) on Tuesday reported below-estimated net profit at Rs 575 crore for the quarter ended 30 September, compared with Rs 505.49 crore in the year-ago quarter.
Shares of the bank fell more than 4 percent on the bourses as the numbers failed to cheer investors. But more than the lower profit number, the biggest worry for the investor community was a significant jump in the stressed asset book of the bank.
In the September quarter, the gross non-performing assets (NPAs) of the bank rose to 5.65 percent of the loans, as compared with 5.48 percent in the June quarter and 5.14 per cent in the year-ago quarter. A similar rise was seen in the net NPA numbers, or NPA estimates after making provisions, as well.
High bad and restructured loans impact the profitability of a bank since, under current norms, banks have to set aside money in the form of provisions on such assets.
For a loan that completely turns bad, the provision amount can go up to 100 percent of the loans, while for fresh restructured loans, banks need to make 5 percent provisions.
In the case of PNB, total provisions of the bank, as of end 30 September, stood at Rs 1,768 crore, out of which Rs 1,638 crore was set aside to cover the bad loans.
According to K R Kamath, chairman and managing director of PNB, the total slippage of the bank stood at Rs 3,974 crore, consisting of fresh slippage of Rs 3,565 crore. Fresh slippages have mainly come from agriculture (Rs 560 crore), industry (Rs 1,453 crore) of which SMEs account for around Rs 598 crore. Retail contributed Rs 211 crore of slippage.
In the September quarter, the bank has seen a rise in the chunk of restructured loans. Fresh restructuring of the bank, during the quarter, stood at Rs 3,297 crore - consisting of Rs 2,152 crore under corporate debt restructuring (CDR), Rs 48 crore under small and medium enterprises (SME) and Rs 1,092 crore under non-CDR or bilateral recasts.
CDR is a forum of lenders, which relax the loan repayment terms for stressed borrowers. Not all restructuring proposals come under this. Such lonas are negotiated bilaterally between the bank and the borrower.
Bad loans have been a major concern for the banking system for many years now, especially after the 2008 global finance crisis. As much as 14 percent of the aggregate loans of Indian banks are stressed assets now. This is just the stated stressed assets.
As Firstbiz has noted before , the unstated bad loans in the banking system are a bigger threat to the financial system, since most of them are hidden in the form of restructured loans.
PNB’s earnings numbers are a strong indication of what could be possibly in store for other state-run banks too, which are set to announce quarterly results.
However, a clearer picture will emerge only after other leading lenders such as State Bank of India and Bank of Baroda release their earnings in the next few weeks.
Continuing bad loan additions underline the critical message to the financial system that the perceived early signs of economic revival shown by macro-indicators are yet to translate into corporate performance, in turn, helping them to maintain loan repayments to lenders.
A major chunk of the bad and restructured loans in the banking system has come from medium-sized companies, which have been hit hard by the economic slowdown and absence of fresh investments. The banking system has responded to this trend by significantly reducing lending to industries in the last two years.
So far this fiscal, banks’ credit growth has remained muted, for which bad loan worries of banks is a major reason. One other reason, as highlighted by most banks for slower credit growth is that new projects are yet to come up, requiring more money from banks.
In the absence of good projects, if banks are forced to expand their loan book, that will be engaging in the art of making good money into bad.
For obvious reasons, banks are more cautious in giving away money to companies unlike in the previous years, on account of high bad loans and several investigations into mismanagement of bank loans.
Banking system is a proxy to the economy and the real picture of the economy reflects in banks’ balance sheets.
As of now, signs of change in the macro-economic scenario and much-hyped positivity in the investor community post the arrival of Narendra Modi as the prime minister are yet to convert to real investments and result in better corporate performance.