Punjab National Bank - Lower Credit Cost To Drive RoA Improvement: Nirmal Bang

Nirmal Bang Report

We hosted the management of Punjab National Bank in order to gain insights into the bank’s business outlook. Based on queries by institutional investors, following are the key takeaways:

1. FY25 guidance on key financial parameters maintained: loan growth – 11-12%; net interest margin – 2.9-3%; credit cost - <1%; exit return on asset of 1% in FY25; RoA of 0.8% in FY25.

2. With comfortable LDR (70%), higher LCR (150%) and excess SLR (Rs 700- 800 billion), the bank has good liquidity position to support credit growth.

3. Proportion of RAM to improve to 60% in two-three years.

4. NIM to be lower than last year due to competition in AAA-rated corporate loans.

5. Recoveries per quarter to be Rs 45-50 billion in FY25. Due to provision coverage ratio (including technical write-offs at 95%), the requirement of ageing provisions has abated. Incremental credit cost will also be lower due to lower slippages target of <1%.

6. The bank does not expect any major impact of loan waivers being announced by state governments as it will be compensated by the respective states.

7. PNB has obtained Board’s approval for raising Rs 75 billion through QIP, Rs 70 billion in AT-1 bonds and Rs30bn via Tier-II bonds. The CET-1 will be positively impacted by Rs 6-7 billion due to new investment norms.

With continued traction in recoveries, lower slippages and falling requirement for aging provisions, we have reduced our credit cost estimate for FY26 from 1.1% to 0.9%. We have revised our earnings estimates by 9.9%, which results in a RoA/RoE of 0.9%/13.2% in FY26E.

Valuing PNB at 1.1 times its FY26E adjusted book value (versus one time FY26E ABV earlier), we have raised our target price from Rs 110 to Rs 120. We have upgraded our rating from a ‘Sell’ to an ‘Accumulate’.

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