In a recent development, Punjab National Bank (PNB) and other seven banks'
exposure to Zoom developers (a Mumbai based project development company)
has come into light. The banks' total exposure to the account is close to Rs26
bn (non-fund based exposure), out of this PNB's (the lead banker) exposure is
close to Rs4.5 bn. In accordance with the media reporting, in Q1FY11, the bank
already recognized Rs3.0 bn as NPAs and made provisions. According to our
communication with other banks' managements some of the banks made
provisions in Q4FY10 itself. Around 76% of the banks' exposure is insured with
ECGC (Export Credit Guarantee Corporation).
Though, it appears that ECGC may not fulfill the banks' claim for the account,
and banks are pushing the matter for corporate debt restructuring (CDR). The
CDR package could provide short term relief to the borrower and to ECGC. The
borrower has been aggressively trying to raise short-term funds for fulfilling
liabilities on account of employees' costs and overheads. Given the status of
the borrower, CDR package might not revive the borrower and banks could have
to write off the entire exposure.
Central Bureau of Investigation (CBI) would be investigating the foreign currency
irregularities and the central bank would investigate huge amount of banks'
non-fund exposure to single account.
In case of PNB, as on end-March' 10, the bank's total gross NPAs was Rs32.1 bn (1.71%
of gross advances) and increased to Rs36.1 bn (1.82% of gross advances). Out of total
exposure, Rs3.0 bn has been recognized as NPAs and provided for in Q1FY11 but extent
of provisioning is unknown. In a worst case scenario, if the bank writes-off entire
exposure in FY11, EPS would decline by close to 6.5% to Rs131 and book value would
drift by close to 1.4% to Rs613. We await complete clarity on the issue to effect the
change in earning estimates and target price. We maintain our earning estimates and
Out Performer rating with a target price of Rs1,562 at 2.2x adjusted book value FY12
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