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Punjab National Bank



PNB’s balance sheet has strengthened – capital ratios are healthy, with Tier-1 Capital at 12.2%. It has healthy CASA share (~44%), higher liquidity (liquidity coverage ratio of 160%). System loan growth is strong at 16-17% while the bank eyes credit growth of 12-14% for FY23E. However, the bank is likely to deliver higher growth in FY24E as balance sheet strength improves further going ahead. The bank’s excess liquidity profile (CD ratio 70%, LCR 160%) in an environment of deposit growth challenges places it well to accelerate loan growth. Asset quality outlook remains strong. Lower slippages formation and healthy recoveries likely to improve asset quality further due to benign credit cycle. PPoP growth should improve as loan growth accelerate, and a stable margin outlook. Strong PPoP growth along with normalization of credit costs should drive a strong improvement in return ratios in FY24E & FY25E.
* Asset quality improvement led by lower slippages & higher recoveries: Overall, PSU banks have emerged stronger after the COVID crisis and the corporate NPL cycle. Going forward for PNB, recovery would exceed new NPA additions and existing trend of strong recoveries would likely sustain. Moreover, trailing loan growth in corporate segment was muted in past few years. Overall, the SMA-2 book stands at ~0.3% of loans. Thus, NPA formation should moderate further. Banks coverage on total impaired loans stands at 52%. Bank is expected to further increase the coverage on impaired loans in H2FY23. Provisions are largely related to back book (Net NPL 3.8% & Restructured book 1.8%). This implies that credit costs would normalize in FY24E. Lower slippages trends are expected in the near to medium term because of improvement in corporate credit cycle. Provision coverage ratio on GNPL stands at ~66%.
* Overall earnings trajectory to remain strong: System loan growth is strong at 16-17%, while PNB is targeting a credit growth in the range of 12-14% for FY23E. However, bank is likely to deliver higher growth in FY24E as balance sheet strength improves further going ahead. The bank’s excess liquidity profile (CD ratio 70%, LCR 160%) in an environment of deposit growth challenges places it well to accelerate loan growth. Asset quality outlook remains strong. PPoP growth should improve as loan growth accelerates with a stable margin outlook. Strong PPoP growth along with normalization of credit costs should drive a strong improvement in return ratios in FY24E & FY25E.

Our Call
Valuation – Maintain buy on PNB with an unchanged PT of Rs.64: We expect RoAs (return on assets) of 0.7% for FY24E and 0.8% for FY25E, driving RoE (return on equity) of 10% and 12% for the respective years going ahead. We believe valuations are cheap for PNB as compared to an improvement in return ratio profile expected going ahead, as the bank is likely to deliver strong earnings growth and higher RoA/RoE led by healthy loan growth, margin improvement and lower credit costs (RoA from 0.3% in FY22 to 0.4%/0.7% /0.8% inFY23E/24E/25E).

Key Risks
Economic slowdown due to higher-than-anticipated credit cost especially from the corporate book and SME portfolio could affect earnings.

Investment theme
PNB has been working upon bringing significant improvement in its internal systems and processes over the last few years. The bank has restructured its processes, with a focus on recovery and resolution. Hence, it is taking steps such as creating a stressed asset-management vertical with a dedicated team of over 2,700 employees, along with creating dedicated branches to focus on SME and retail disbursements. Public sector banks are an attractive play on strong sectoral tailwinds in the banking sector due to cheap valuations owing to expected improvement in the earnings profile.



Price Target: 64

Refer: PNB for more details.