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PNB emerged stronger during the Pandemic year FY21 compared to the previous financial year. The absolute GNPA declined 6% YoY to ₹1.0tn and absolute NNPA stood flat at ₹385bn. Provision coverage for bad loans improved to 80.1%. Moreover, the NII/NIM drag down in 4QFY21 is insignificant due to one time impact of interest reversal from pro-form slippages.

Furthermore, Deposit growth was stable, with healthy CASA growth of 11% YoY, driven by strong growth in saving deposits (12% YoY) and CASA ratio improving to 45%. Additionally, improvement in CET-1 (10.6%) is likely to propel balance sheet growth and carries lower dilution risk. The major concerns of higher SMA 2 (5% of book) and restructured (~0.4% of book) are already in the price.

The bank expects bulky resolution in FY22E. The asset quality concerns are likely to be absorbed by internal accruals and we estimate a maximum net-worth erosion of 20%. Inexpensive valuation of 0.5x PBVPS and strong associates (PNB Housing, PNB Gilts) makes PNB a contra play and we recommend a BUY.

Corporate Stress easing; FY22E may be a recovery year:

Reported GNPA ratio improved to 14.1% from pro forma 14.7% in 3QFY21, driven by higher recovery and write-offs. However, elevated quarterly gross slippages of ~₹117bn (ex-pro forma) in 4QFY21, led by Retail (₹34bn) and MSME (₹93bn), was upsetting. SMA-2 pool too stands elevated at ~5%, led by Retail (1.3% of loans) and MSME (1.6% of loans). PNB has restructured ₹26bn (0.4% of loans) in FY21, while another ₹70bn (1% of loans) could be in the pipeline, mainly from corporates. Specific PCR (ex-TWO) stands flat at 63% .The management expects recovery from DHFL in H1FY22, with additional cash recovery of ₹11bn in NCLT to partly offset any increase in NPAs.

4QFY21 interest reversal (one-time) is immaterial:

SME growth picked up at 7.5% YoY mainly driven by ₹110bn of loans disbursed under ECLGS. Overall domestic CASA ratio remains high and healthy at 45%, leading to lower cost of funds. However, NIM contracted 41bps QoQ to 2.7% due to the continuation of subdued growth/lower LDR, higher interest reversals on NPAs and interest waiver due to the Supreme Court order. The bank has guided for 8% credit growth in FY22 on the back of improved secured retail momentum and some back-end support from Corporates & SME.

NPA sales to NARCL (Bad bank) to provide interim relief:

PNB plans to transfer bad loans of ₹80bn to the NARCL (bad bank). These loans are 100% provided and management believes it may be transferred at 25%. NARCL will make payments using a combination of cash and security receipts (SRs). This may aid PNB’s equity capital position in the interim (CET1 currently at 10.6%).

Outlook and Valuation:

Factoring near term stress from restructured book, we expect the bank’s loan book to fatten cautiously at a CAGR of 10% over FY21-24E, led by retail book growth. In our opinion, the bank’s credit cost will normalise by FY23E and estimate return ratio ROA/ROE of 0.2% and 3% in FY23E. We value the standalone entity at 0.5xFY23E BVPS (₹90.5) and value of associates and subsidiaries at ₹5 to arrive at a target price of ₹50. We recommend a BUY on PNB with a potential upside of 20%.

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