When the finance ministry decided to merge 10 public sector banks into four in August 2019, the idea was to create giant ‘NextGen banks’ with the alacrity to grow faster. The biggest consolidation exercise in the banking space was aimed at creating big lenders that will shrug off the image of a staid state-owned lender. The government announced four major mergers of public sector banks (PSB), bringing down their total number to 12 from 27 earlier.

A year after United Bank of India (UBI) and Oriental Bank of Commerce (OBC) merged with Punjab National Bank (PNB) on April 1, 2020, it is time to do a reality check. As expected, has it produced India’s second largest PSB after the State Bank of India (SBI), after pushing Bank of Baroda (BoB) one notch down? Has the painful transition yielded any positive outcome?

The lender—hit by a $2-billion fraud and money laundering case revolving around disgraced diamond merchant Nirav Modi—has created a banking behemoth with total business exceeding ₹18 lakh crore. It has completed the massive integration of the business, people, and technology, preparing itself to realise gains from the synergies of amalgamation. At present, PNB has a wide presence across the country with over 10,800 branches, 13,900 ATMs and 12,300 business correspondents with a 100,000-plus strong workforce.

S.S. Mallikarjuna Rao, the 58-year-old managing director and CEO of PNB, is excited about the journey so far. Despite the pandemic, he has achieved a seamless integration without any major disruption.

“We have completed our technology integration in record time by December 2020, to be able to focus on the business priorities from year 2021 onwards. We have also realigned various internal processes and revamped the organisation structure to position the bank as customer-centric and future-ready. Seamless integration and harmonisation of products, processes, distribution channels, creation of specialised units, and technology platform have benefitted customers in terms of wider product offerings and better service experience,” said Rao in a statement.

Of course, his experience as MD & CEO of Allahabad Bank prior to the PNB mandate, when he implemented an organisational restructuring for efficient functioning of the bank, has come in handy.

A banker with over three decades of experience, Rao says the amalgamation has been a remarkable journey for all the stakeholders with successful harmonisation of varied working cultures and integration of diverse internal processes and complex technologies while overcoming the challenges posed by the pandemic. According to PNB, the technological migration activity was completed with a near-zero disruption. The bank has completed the migration activity with minimal disruption. Now, all customers will be able to enjoy an array of services on its wider network of branches, ATMs, and robust digital channels, said the statement.

The merged entity has managed to spread wider with a greater reach in the North-Eastern regions. It has enhanced its presence in North-East in terms of branches, business, and customer base. The wider geographical footprint has helped it serve customers more effectively and efficiently.

The digital-first approach has made the lender stand out. The bank has been focussing on improving digital offerings to the customers and proposes to undertake new initiatives such as end-to-end digital pre-approved personal loans for its salaried customers, e-Mudra loans up to ₹50,000, and video KYC for online account opening, among others.

Being one of India's leading banks, PNB has a larger and more constructive role in ensuring inclusive and balanced growth among individual entrepreneurs and corporates in India, said the statement.

Morgan Stanley recently upgraded PNB to ‘equal-weight’ from ‘underweight’ since its valuations are cheap.

In a recent research report, Emkay Global, however, said the merger/asset quality overhang has kept its growth tepid. In February, it posted a higher-than-expected net profit of ₹506 crore, much above the estimated loss of ₹440 crore, led by lower opex and contained provisions. The lender’s cumulative Covid-19-related provisions (including for proforma slippages/restructuring) has improved to ₹3,000 crore.

The report said proforma gross non-performing assets (GNPA) stood high at 14.7% in the third quarter, while the restructuring book was at ₹12,000 crore (1.8% of loans) with some more in the pipeline. “Overall collection efficiency remains sub-par at 87%-88% as of December 2020, but management expects it to improve to around 94% by March 2021.”

According to Emkay Global, the overall credit growth remains sub-par due to merger overhang and continued risk averseness.

“The credit growth remains sub-par at 1% year-on-year due to sluggish growth across segments plagued by internal integration-related process and risk averseness post series of frauds. PNB has disbursed ₹11,000 crore loans under Emergency Credit Line Guarantee Scheme (ECLGS), which led to 2% quarter-on-quarter growth in its MSME portfolio. Deposit growth, too, remains sub-par at 1% year-on-year, but CASA ratio remains healthy at 43%. NIM contracted 12 basis points quarter-on-quarter to 3.1% due to interest reversals and lower yields. The bank has optimistically guided for credit growth of 4% in 2020-21, with improving demand scenario,” said the report.

During the third quarter, the bank reported proforma slippages of ₹12,900 crore, leading to the proforma GNPA ratio of 14.7%, higher than what was reported earlier at 13%. The ₹12,000-crore restructuring pool, 1.8% of loans, was mainly contributed by corporates (₹9,000 crore) and retail (₹2,000 crore), with more likely in the fourth quarter.

The Covid-19 contingent provision of a little over ₹3,000 crore (46 basis points of loans) was in line with its peers (Canara Bank with 30 bps; BoB with 48 bps), which includes ₹450 crore purely for Covid-19 contingency, ₹2,300 crore for proforma slippages, and ₹290 crore for restructuring.

“We have revised our earnings estimates for 2022-23 by 20%-60%, factoring in moderate asset quality stress and likely lumpy resolutions,” said the report.

The bank has largely provided for proforma stress in the third quarter as it does not want to carry any legacy issue going into the fourth quarter, while the restructuring may attract another ₹1,000 crore of provisioning, leading to a guided credit cost of 2.8% for 2020-21. PNB expects recovery from Bhushan Power to finally conclude in the fourth quarter coupled with some more resolutions in a due course.

After the seamless integration, PNB is now ready for a smooth take-off.

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