Hold Punjab National Bank Ltd For Target Rs.42 - Edelweiss Financial Services
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Normalisation a little away
Punjab National Bank (PNB) reported a better-than-expected Q2FY22 PAT of INR11bn – owing to a tax write-back – even as core operating performance remained weak. Asset quality shows persistent challenges: slippages high at >5% (annualized), SMA-2 + restructured at 2% level. Soft business momentum reflected in a 30% YoY dip in core profitability.
Still evolving stress and low provision stock forebodes elevated credit costs going forward too, keeping us on guard. High stress, lower buffer, challenges on business and risk of subsequent covid waves indicate that transition will be arduous and normalization is still awaited. We maintain ‘HOLD/SU’ with a TP of INR42 (unchanged).
Asset quality continues to disappoint; outlook challenging
Slippages during the quarter were high at INR9bn (>5% run-rate); however higher recoveries restricted GNPLs/NNPLs to 13.6%/5.5% (versus 14.3%/5.9% in Q1FY22). While restructuring looked reasonably controlled, we are not comfortable enough to form a decisive view on PNB’s equity sanctity. There is plenty to keep us on guard: i) A potential stressed SMA-2 and restructured pool, still at 2%, remains high despite substantial slippages; and iii) inadequate provisions to absorb potential losses. Asset quality challenges will persist and credit cost should remain elevated in the near to medium term.
Core earnings momentum continues to be soft
Business momentum continues to be soft – loan book growth of sub-2% and deposit growth of sub-1.6% QoQ – significantly lags peers in performance. This along with sustained pressure on NIMs affected core operating profitability (core profitability saw 29% YoY dip), even though operating cost was under control. With limited levers on NIM improvement and in absence of growth, operating profitability will remain subdued. We believe operational issues faced by PNB will continue to pose a challenge and the road to recovery remains arduous.
Outlook and valuation: Uncertainty persists; maintain ‘HOLD’
A weak earnings profile, operational issues and a diluted franchise render PNB a structurally challenged investment proposition. Furthermore, the merger brings its own complexities and calls for a close watch. Maintain ‘HOLD/SU’.
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