PNB’s QIP issue sets a floor price of Rs 35 per share

Several Public Sector Banks rank quite high when it comes to holding toxic assets on their books. Additional pressure piling on to a swathe of commercial, industrial and retail loans because of the first and the second lockdown has dampened the lending sentiment and increased the quantum of non-performing assets in the ecosystem. The balance sheets of many public sector banks are weakening further as business activity comes to a halt across India. Meanwhile, bank credit offtake for commercial projects keeps tapering sequentially.

Earlier on Monday, the board of directors of the public sector lender Punjab National Bank met to approve the opening of the qualified institutional placement offer.

The bank in a regulatory filing disclosed that its Capital Raising Committee will meet on May 14 to assess and arrive at the issue price of the equity shares that will be allotted to QIP buyers.

It was in July 2020 that the board of the PSB had met and approved the issue, whereas the shareholders had approved the same at the Annual General Meeting held in August last year.

In its meeting on May 10th, the board of directors of the company passed a resolution concerning the approval and adoption of the Preliminary Placement Document and an application form connected thereto. The board additionally also accepted the floor price of Rs 35.51 for every equity share that will be allotted for the QIP. This approval was accorded under the SEBI’s issue of capital and disclosure requirements regulations.

The sorry state of PSBs

Recall that in March, another public sector bank, Bank of Baroda had revealed a large stinking pile of toxic assets when it had approached the market via a qualified institutional placement to raise funds. THE PSB had disclosed that in its quarter ending December the special mention accounts had rocketed to 21% from just 8% in the fourth quarter of FY20.

As per an RBI notification of December 2019, Special Mention Account (SMA) is an account that is exhibiting signs of incipient stress resulting in the borrower defaulting in timely servicing of her debt obligations, though the account has not yet been classified as NPA as per the extant RBI guidelines.

It is worth noticing here that the special mention accounts were in addition to the gross bad loans that the lender had already reported revealing the full extent of the pressures that not just banks but domestic businesses are facing as well because of the lockdowns.

Evidently, PNB also has a substantial pile-up of toxic assets on its books. As of December, the bank had 13.2% loans that were due for repayment for a month or more. For Bank of Baroda, this figure was at 8.1%. Market experts have pointed out that PNB recorded a sharp increase in stressed loans during the moratorium loan period that was declared by the RBI last year.

As per market filings, PNB has twice the number of SMA2 loans in the retail and corporate sector as compared to Bank of Baroda. SMA2 loans are loans where the principal or interest payment is due for anywhere between 61 to 90 days. Overall the situation is quite bad for the PSBs where overdue loans are progressively rising, however, even here, it is PNB that is the real outlier. It reported a gross NPA ratio of 14% for the quarter ending December. Loans to corporates and small businesses including loans to micro, small and medium enterprises highlight the rise of stress in its loan book.

PNB stock performance

Not surprisingly, PNB hasn’t been performing as well on the stock market compared to its PSB peers. Contrasted with November 2018, when it touched a high of Rs 206 per share, it is now down to Rs 35 in May. Even during sharp rallies that propelled other public lenders, PNB seemed to have skipped the ride.

PNB’s QIP at a time when stress is quite visible on its balance sheet serves as a warning to a lot of investors who are attracted to its balance sheet strength due to mergers. Only time will tell if the provisions set up not just by PNB but by other PSBs as well will be enough to absorb the erosive impact of the second lockdown.