Asset quality pain not over yet; see 10-11% Q4 credit growth:PNB

While the clean-up of bad loans has begun, it is too early to say that the asset quality pain is over for the bank, says Usha Ananthasubramanian, MD & CEO of the Punjab National Bank (PNB). State-owned lender PNB reported disappointing third quarter numbers with a 93.4 percent fall in its net profit to Rs 51 crore and a 2.7 percent decrease in net interest income (NII) to Rs 4,119.6 crore. The bank’s gross non-performing assets (NPAs) rose to 8.47 percent in the quarter gone-by as compared to 6.36 percent in the quarter before this. Provision for Q3 went up by 100 percent to Rs 3,775 quarter-on-quarter. Ananthasubramanian says that over Rs 5,000 crore fresh slippages have been reported from the Reserve Bank’s asset quality review (AQR) process. The bank also put in 13 accounts worth Rs 6,800 crore under strategic debt restructuring (SDR) and another 13 accounts amounting to Rs 7,000 crore under RBI’s 5/25 rule. The pain is mostly in iron, steel and infrastructure accounts, says Ananthasubramanian adding that the bank certainly needs a chunk of the promised capital infusion from the government. Going forward, she expects a 10-11 percent credit growth in the Q4 and net interest margins (NIMs) of 2.6-2.85 percent. Below is the verbatim transcript of Usha Ananthasubramanian’s interview with Latha Venkatesh and Ekta Batra on CNBC-TV18.Latha: First, if you can clarify some numbers. You have spoken about Rs 13,482 crore slippages. How much of this was slipping from the restructured book?A: From the standard restructured book it was Rs 2,232 crore. The other standard accounts amount to Rs 10,998 crore. Latha: Last time the standard restructured outstanding book stood at Rs 38,000 crore. A: Yes and now it is Rs 35,000 crore. Some of the assets have moved from there. Latha: Into non-performing loans (NPLs), right?A: Yes. Latha: Besides this Rs 2,300 crore which slipped from restructured book, the other Rs 10,000 crore was largely fresh slippages from the standard non-restructured book?A: Correct. Many of these cases come out of the asset quality review (AQR). It is about Rs 5,500 crore.Latha: Which industries were these largely?A: Mainly the steel industry to an extent infrastructure. Latha: How many accounts in the asset quality review (AQR)?A: There could be 10-12 accounts of different sizes. Ekta: Just wanted to get a couple of stats in for quarter two. Were there any sales of loans to asset reconstruction companies (ARC), 5:25 this quarter as well as strategic debt restructuring (SDR)?A: ARC sales has been around Rs 1,372 crore. We propose another Rs 2,000-2,500 in the current quarter, we are targeting. As regards 5:25 it is about Rs 6,800 crore in 13 accounts and then SDR is again about 13 account with Rs 7,000 crore. Latha: Do you provide for any of these SDR’s or the 5:25 ?A: There is a provision started happening because we do not know the finality of these accounts. Latha: So this would be about what 5 percent that you would have provided?A: Yes, we have started may be 2.50 percent and slowly we will graduate it. Latha: The key sentence in your notes to accounts, points number 6 was that you are going to utilise the entire period given by the Reserve Bank of India (RBI) to recognise the assets identified by the asset quality review. So should we expect another Rs 9,000-9,500 crore of slippages next quarter as well that is quarter four?A: We need to look into some of these accounts. Some of them may successfully go through the SDR route, possibly they can be out and some of them are heading towards their COD – the completion. So, if it could happen before March there could be a relief but you have to wait and watch.Latha: At the moment, you started off by equally dividing you trouble between the two quarters?A: Almost. Yes, we have done little over what, we need to do equally but we have done little more. And not only that, some of these accounts, we need to have factored the latest, like the devolvements, due date defaults and those kind of things, which have also been factored beyond the number that has been specified and provided.Ekta: So, it is fair to assume that the slippage figure would be similar to this quarter in Q4?A: I would be able to say, but I cannot say that slippage is controlled or it will be arrested, but there is another list. Plus we also need to because there a sense of clean up has started. So, how fast and how far we can do, that has also to be looked into.Latha: What is the regulator and your own assessment of FY17? How much more or what kind of cases will you take up? What might be approximately that number?A: Some of these stranded accounts have failed now, you understand. So, we are getting prepared to tackle these accounts, to work with the promoters and see what best can be done. It may not be very large, but even the medium ones have to be tackled, because the number is more there.So, how we come together and work with the promoters and the promoters also take interest in distressing themselves, not only the banks and themselves, will decide. So, I would not be able to give a number right away, but there will have to be some going down the line. We cannot say that the cleanup is over or the cleanup will come to an end. It will all happen continuously but it is for good, I feel. This will lend a lot of robustness to the balance sheet.Ekta: What we are trying to get at is whether Q4 will be as painful as Q3 in terms of slippages an if you could give more details in terms of maybe the pipeline for the 5:25 as well as SDR and will Q4 be as painful as Q3? Would that be a bottomline that we would work with?A: I do not want to take a pain killer and say the pain is over. But, there will be certainly pain. There will be pain but I do not want to predict the degree of pain because we are working on some of these accounts. How fast and how well we can mend the accounts, that needs to be seen.Latha: As Ekta was asking, any visibility on what maybe the amount of SDRs you are looking at which is already very clear and prevalent. SDR and 5:25, how much maybe that load?A: I told you there are 13 cases in the 5:25 amounting to about Rs 6,800 crore. And fortunately, the number in SDR category is also the same. So, let us see how we are able to transform these accounts successfully. And more of it, we do not have any, we do not foresee anything at this moment, but there could be some more accounts getting added. But I will tell you one thing, we need to see the success of these mechanisms._PAGEBREAK_Latha: At the moment what is your sense, in this 13 cases have you been able to identify promoter in one or two, can we find an example being set, in how many cases?A: The SDR is invoked but then it is not taking 50-51 percent more on your lap and then trying to run a steel unit or whatever it is. How well we shift it to the promoter -- it is a transit arrangement that banks are taking over. So I would say, I don’t think 13 -- maybe 2-3 could happen in my gut feeling.Given the status of the industry more of it being kind of steel and power and gas based plants, you don’t have takers.It is very difficult to get the investors because people want to keep away from steel, when the gas supply is not there, people want to keep away from such plants.Reema: What about the other parameter, for example, your global net interest margins as well as your domestic net interest margins, what might be the guidance for Q4 as well as your credit growth, which was around 8 percent for this quarter?A: The global name for this quarter is at 2.75 and annualised is 2.87. Going forward, guidance could be anywhere between 2.6 and 2.853.Reema: Credit growth guidance, how much may it grow in Q4?A: We may touch 10-11 percent.Latha: The statement that came from the Reserve Bank of India (RBI) is that by March 2017, we want to see the balance sheets largely cleaned up. What is the instruction for the next year? This year they have identified for you, common assets across banks, what is the guidance for FY17, what kind of assets do they want identified?A: The intent on the part of the RBI and on the part of the bankers is certainly to clean up the balance sheets. So as we start identifying, we start working on accounts. The direction is to cleanup by March 2017. I think that is a large task of a very large order given the conditions, given the economic sluggishness that we are facing.Ekta: In presser, you mentioned capital infusion is something that the bank would require, so how much are you possibly seeking from the government, how much is promised and would you be looking to sell non-core assets or your stake in certain companies etc in order to build up your capital base?A: We are exploring some sell of our investors and maybe looking at non-core assets, we have started looking at it but as a bank which needs to and which is expected to involve itself in the economic growth of the bank in terms of its largescale lending, I think we need to have a share of the capital. I don’t know what would be given to us but certainly I hope that I am going to get some capital.Latha: Your nine months profit stands at about Rs 1,400 crore, you maybe called upon to provide more than that in Q4?A: Possibly because I told you that it will be -- when a cleanup exercise is taken up, I think maybe we have to be very serious about it. Having taken up, there cannot be a half-hearted attempt at it. So let us hope -- hope is the best companion so some relief should be visible. Let us see post Budget, how it pans out.Ekta: Coming back to the asset quality, just wanted to get more granular in terms of where the stress could come from in Q4, you said 10-12 accounts were from the iron and steel space, can you give us a sense in terms of which would be the sectors, which might see incremental stress in the coming quarter for you including asset quality relief?A: Maybe some more steel and infrastructure. I won't be able to tell the number now. We are hoping certain achievements, milestones which can give us a relief.