Provisions punish Punjab National Bank profit

Non-interest income slipped and operating profit declined 2.9% from a year ago, the first such instance in at least three years. Photo: Pradeep Gaur/Mint
Live mint :Ravi Krishnan :Thu, May 09 2013. 05 00 PM IST

The bank shoring up its provision coverage ratio leads to a steep one-fifth fall in net profit

The 4.57% gain in Punjab National Bank (PNB) shares after earnings were announced was more of a relief rally. Although profits fell short of analysts’ estimates, investors seemed to have expected the worst for asset quality. Those fears seemingly didn’t materialize, although the bank’s operating performance left much to be desired.

At the end of March, gross non-performing assets declined toRs.13,466 crore from Rs.13,998 crore three months ago. As a percentage of total assets, bad loans came down to 4.27% compared with 4.61% at the end of December.

One reason for that improvement could be the sharp increase in restructured loans during the March quarter. PNB recast Rs.6,444 crore worth of loans in this period compared with a combined Rs.7,703 crore for the preceding three quarters. That, however, was on expected lines as the Reserve Bank of India had changed its norms in recent times; higher provisioning costs on restructured loans this fiscal would have prompted banks to push for more such deals in the March quarter. Including recast loans, stressed assets now stand at 14.47% of PNB’s loan book, among the highest in the industry.

The bank’s loan growth was only 5.1% from a year ago, far below the industry rate. Even that had a forced quality to it since loans added in the March quarter accounted for 76.3% of PNB’s incremental advances for fiscal 2013. On the other hand, deposits grew at an even slower pace of 3.2%. PNB’s credit-deposit ratio stands at an uncomfortable 78.84% now.

One positive for the bank, however, is that low-cost current and savings account (Casa) deposits have improved. As a proportion of total deposits, Casa is 40.9% now, a 4.7 percentage point gain from a year ago. That has helped PNB lower its cost of funds and boosted its net interest margins to 3.51% in March, 4 basis points up from a quarter ago. One basis point is 0.01 percentage point.

As a result, net interest income gained 14% from a year ago. However, a decline in core fee income and recoveries from written-off accounts could not be compensated by hefty gains in trading profits. So, non-interest income slipped and operating profit declined 2.9% from a year ago, the first such instance in at least three years. That led to a steeper one-fifth fall in net profit as the bank shored up its provision coverage ratio.

PNB shares are still trading below their expected book value for fiscal 2014. However, a rally will sustain only when concrete indicators of economic growth show up.