Public sector banks have always been at the wrong side of the bad loan trend over the past several years. The pandemic has meant that already weakened balance sheets are facing further pressure. Even so, shares of these lenders have outperformed the broad market in the past one month.
Recall that in March, Bank of Baroda (BOB)had disclosed a rather huge pile of stressed loans when it came to the market to raise funds through qualified institutional placement of shares. The lender had reported that its special mention accounts (SMA) pile jumped to 21% by December quarter from just 8% in the fourth quarter of FY20. This is in addition to gross bad loans that the lender had reported and captures the fully impact of the pandemic on the bank’s loan book.
A similar warning is now found in Punjab National Bank’s disclosures, too. The public sector lender aims to raise funds through a QIP. As of December, the lender had 13.2% of loans with repayment overdue more than one month. For Bank of Baroda, this ratio was just 8.1%. Analysts at Nomura point out that PNB witnessed a sharp increase in its stressed loans during the moratorium period last year. “Segment-wise, SMA2 for PNB is nearly double that of BOB in the retail and corporate sector. We believe, in general, the overdue loans are significantly high for the SOE banks,” a note from Nomura said. SOE stands for state-owned enterprise.
What’s more is that Punjab National Bank reported a gross bad loan ratio of over 14% for the December quarter. Its most stressed segments remain corporate loans and small businesses, too. In fact, loans to micro, small and medium enterprises dominate those where repayments are overdue for more than thirty days or SMA loans. Such loans capture the incipient signs of stress.
The public sector lender’s shares have trailed that of its peers and the broad market in the past one month. To be sure, Punjab National Bank has had a high bad loan ratio for more than five years now. Ergo, the lender’s shares have hardly shown vigour even during sharp rallies in public sector bank shares. That said, PNB’s metrics are a warning sign to investors warming up to public sector lenders simply because of balance sheet heft due to mergers. The second wave and its impact should be watched closely on these banks to determine whether their fortified capital would again erode towards provisions.