Is PNB down the rabbit hole?

Last week, the country’s largest lender State Bank of India said it has an exposure of $200 million (Rs1,200 crore) to Punjab National Bank (PNB).

The irony that a bank has to clarify the impact of its exposure on another public sector peer cannot be missed, especially at a time when banks have been at pains to clarify their exposure to loan defaulting companies.

So, is PNB, the second largest public sector bank, a bad penny?

The answer should be obvious. In the last two years, all that could go wrong has gone awry with the bank.

The $1.8 billion debilitating fraud is perhaps the biggest disaster that has happened to the bank. But the fraud perpetrated by PNB officials in collusion with jeweller Nirav Modi and his relatives is not the first red flag for investors on the lender’s shoddy processes and practices.

Consider the red flags in the recent past.

Two years ago, PNB went down in history to be the only bank to report the biggest quarterly loss ever when it made a Rs5,370 crore loss in the March quarter of 2015-16. Of course, that was a fallout of the Reserve Bank of India’s ruthless asset quality review that mandated banks to identify and make provisions against all errant borrowers. Given that all public sector banks were pushed into losses, PNB making the biggest loss of all was not a black swan event. It was viewed as the unfortunate outcome of a slowing economy’s effect on all banks.

But PNB’s exposure was the largest to the most troubled borrowers. It is clear that the bank’s risk assessment is wanting and that the degradation of its loans faster than its peers’ cannot be a mere coincidence.

Seven quarters on, PNB is in no great shape. The lender has written off Rs11,000 crore worth of loans in 2017-18 so far. Its gross and net bad loan ratios are not far away from what they were a year ago.

PNB’s profits have been riding the chariot of trading gains, which ended in the September quarter. Its core income growth has been soft. Its loan recovery from errant borrowers is even worse than before.

Compared with the performance of most of its comparable peers, PNB falls short on many fronts.

In the light of the fraud that has taken over the narrative on PNB, its past financial performance now takes on a different colour.

PNB has not learnt a lesson but have investors handed the lender a suitable punishment? The bank’s market capitalization has eroded by 27% since the fraud came to light four days ago. The punishment has been swift and severe.

Of course, PNB being a government bank, depositors are protected and the bank will be bailed out, come what may. The real question is: will this episode lead to real change at PNB, or will it soon be business as usual?livemint