IS PNB NPA OVERHYPED?

Recently, I came across many articles that revolved around how Punjab National Bank is a potential multi bagger majorly because of one major aspect on its financial statements - Net NPA.

Background

In 2020, government of India introduced a merger between public sector banks from 10 nationalised banks to 4 major lenders. Following the merger there was strong sentiments towards increased efficiency and better performance for the PSU sector banks as RBI will have to keep track of less number of entities. This rule was passed in order to make sure that PSU banks move towards a higher level of operational efficiency, improve the loan generation profits and thus pursue higher profit margins over time. In addition, merger of major nationalised banks would lead to better designed management board as repetitive positions across the different banks would be removed.

As a result of this ruling, Punjab National Bank merged with Oriental Bank of Commerce and Union Bank of India to form the second largest leader after SBI India.

What is NPA?

NPA in its full form means Non-performing assets. To define these, they are simply loans given out by banks for which interest payments have not been made for quite some time. As a result, these are considered as bad loans and expensed out thus, affecting the net profit margin for the bank. Over the last few years, PNB and a few other PSU banks have come under scrutiny regarding poor asset quality as they passed loans without proper collateral and sketchy terms to recover the amounts. Due to this, PNB, especially, had a large value in its net NPA columns on the financial statements.

Why the hype?

Since the passing of the law, all PSU banks posted very strong financial performances as they each focused on improving the Net profit margins. However, in case of PNB, the net NPA had been at an all time high, and with major loans provided towards the agriculture sector, Covid- 19 along with farmer protests allowed people to seek comfort through the moratoriums offered by the RBI.

Recently, in the last couple of quarters, PNB board shifted its focus on reducing the net NPA to low levels by focusing on recoveries of bad loans and improving the asset quality for the future. As a result, they have reached very close to their target of 3.5% net NPA by March 2023 as they posted a number of 3.8% in the recent quarter end report.

What this means for PNB?

Given the low reported net profit numbers in the financial statements, it is expected that the image of PNB as a bank issuing sketchy loan agreements would slowly die down as the new management focuses on drastically improving asset quality and increasing recoveries. With this outlook, belief is in a stable strong performance from the bank at a stable growth rate. Additional factors such as Fed in the USA halting the interest rate hikes, could lead to lowering of interest rates in India as well. This would lead to higher business for the banking industry in the next few quarters.

Conclusion

On observing the last few earning calls and financial reports, I believe PNB is working on the right path to improve its public image and vis-a-vis improve its credibility and performance as PSU bank. With a Price/BV of 0.6 against an average of 1.1 for PSU banks, I believe the bank has a lot of potential to improve and also in undervalued in the stock market.