Unlike other public sector banks (PSBs) that were hit hard by the Reserve Bank Of India (RBI)'s asset quality review (AQR) few years ago followed by IL&FS debacle, financial crisis in Jet Airways and NBFCs' liquidity crunch, the Delhi-based Punjab National Bank (PNB) had an added challenge: Fugitive diamond businessman Nirav Modi duping PNB of over Rs 13,000 crore, which created a big hole in its balance sheet.

In the just concluded financial year 2018-19, the fourth largest bank in the country in terms of balance sheet has reported a huge loss of Rs 9,975 crore. The bank reported even bigger loss of Rs 12,282 crore a year before that. As a result, the market valuation of the bank has plunged to Rs 37,131 crore. The valuation is at rock bottom given its balance sheet size of Rs 7.74 crore. For example, the ICICI Bank with balance sheet size of Rs 7.20 lakh crore has a market valuation of Rs 2.72 lakh crore. Axis Bank with balance sheet size of Rs 8 lakh crore has a market valuation of Rs 2.08 lakh crore. Private banks that have been through a difficult phase have shown better efficiency and profitability ratios, which gets factored in the market price.  

According to analysts, the PNB is back on a growth path. The struggling bank actually grew its advances at 14 per cent in 2018-19. In the last two previous years, the growth in advances were in single digit. Currently, growth is a bigger challenge for banks as corporate lending is not picking up and the risk element has also increased manifold in funding a greenfield project. The bank has also improved its NPA (non-performing asset) provisioning coverage ratio from 51 per cent three years ago to 74 per cent. The share of low cost deposits i.e. CASA has also improved substantially in the last three years. The growth in retail advances is also robust.

So, what is driving the bank down? The biggest pain point is the asset quality deterioration. The gross NPA is still very high at 15.59 per cent. Given the slowdown in the economy, the NPAs will take some time to stabilise at a lower level. The NPA provisioning at the current level alone is in the region of Rs 24,000 crore.

The future profitability depends a lot on the recovery from bankruptcy cases and asset reconstruction companies. The bank is relying on write back amounting to Rs 4,000 from such cases.

Even as the bank gets back to normal operations, PNB like other PSBs has to work on its high cost structure. The cost-to-income ratio, an indicator of cost efficiency, has been on the rise for PNB. Similarly, the bank has to speed up sale of non-core assets to generate liquidity and focus on its core-banking business. The digital banking is another segment where PSBs like PNB have to catch up a lot. The other big risk for PNB comes from the consolidation exercise. PNB has been often mentioned as one of lead banks for the next BOB-Vijaya-Dena Bank kind of a three-way merger. If government announces a merger, PNB's challenges would only compound in the near future.

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