Merger Benefits Helps PNB Cushion Wave 2 Blow, But Bad Loans Remain

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The National Bank of Punjab (PNB) numbers for June did not indicate new problems and did not see much relief after the second wave of coronavirus.

The public sector lender managed to show good operating results, despite the fact that its loan portfolio barely grew. PNB was helped by a sharp cut in operating costs due to additional profits from a merger with two other public sector banks and low deposit rates.

PNB acquired Oriental Bank of Commerce and United Bank of India and the merger took effect on April 1, 2021. The merger resulted in the rationalization of the branch network in addition to the merger of the various verticals of the three lenders. Following the merger, the bank has modernized more than 500 branches and may further merge branches to reduce operating costs.

Stress is present

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Stress is present

An 8.4% decrease in operating expenses increased operating income by 15.5% year-on-year.

However, interest income from operating activities did not show much interest due to the lack of lending growth.

Managing Director CH. S.S. Mallikarjuna Rao hopes to see lending growth resume in the coming months. In a worst-case scenario, a bank could see credit growth of 6-8% in fiscal 22, he said Tuesday. According to him, a strong growth in private capital investment can raise them even up to 8-10%.

The PNB needs loan growth to bring down the elevated bad loan ratios, which are more a consequence of outdated defaults than the current stress of the pandemic.

Asset quality continued to be a fly in the ointment for PNB as total bad loans remained above 14% in the June quarter. The lender has a restructured loan of about Rs 12,000 crore to watch for stress. The bank saw Loans totaled Rs 8,241 during the June quarter. This meant that stocks remained elevated, with Rs 4679 crores deferred during the quarter.

PNB hopes it won’t have to make large reserves in the coming quarters, citing an improvement in July collection. A provisions coverage ratio of 80% adds some confidence to this hope. However, a bunch of outdated bad loans will continue to bother you.

The pain points of PNB are corporate loans. About 13% of its corporate portfolio and 18% of its micro, small and medium-sized enterprises (MSME) portfolio as of June were inconclusive. The bad loan ratio in the retail loan portfolio is also close to 6%, which is higher than that of peers, which is worrisome.

In addition to loan growth, PNB should be able to increase returns in order to lower its bad loan ratio. A newly formed bad bank can help, and PNB is making efforts too.

“We expect that around This year, it is recovering Rs 3,000 crore every quarter, ”Rao said. Rs 3954

A bank’s success in recovering losses depends on how limited the impact of a potential third wave on companies will be. Thus, the pandemic has weakened the balance sheets of small businesses, which means that recovery in this area will be challenging.

Analysts believe operating performance could continue to improve, given that the benefits of the merger have begun to pile up and management’s commitment to reducing additional reserves provides added comfort.

Given the bank’s failure to reduce its outstanding loans, estimates remain low. Despite a 9% increase since April, the stock is trading at a large discount from its 22 fiscal year assessed carrying value.

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