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Our Investment Thesis is based on 1) Easing corporate stress with higher recovery, 2) Risk adjusted growth and 3) An “in-expensive” valuation. Bad loan recoveries and sale to NARCL may clean up the balance sheet with NPA normalization. Furthermore, steady credit growth along with lower credit cost are likely to boost the return ratios; which makes the stock rewarding at in-expensive valuation (0.35x standalone) with strong associates (PNB Housing, PNB Gilts).

Recovery to accelerate further with ease in corporate stress:

Reported GNPA ratio is improving continuously since previous ten quarters with an exception of 1QFY22 as NPA recognition resumed. Slippages during the previous quarter were curtailed at ₹50bn (~3% v/s run-rate of 8% over last three quarters); this restricted GNPA/NNPA to 12.9%/4.9% (v/s 16.3%/7.2% ten quarters ago). The headline numbers clearly suggesting a steady improvement driven by higher recovery and write-offs. PNB plans to transfer bad loans of ₹20bn to the NARCL (bad bank) in tranche 1 and ₹60bn in tranche 2. 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 10.7%). Management guidance is quite affirmative and it expects GNPA and NNPA ratio to be below 12% and 4.5% by end of FY22E with credit cost guidance of 1.5%. Under base case scenario, we estimate the NNPA to be at 4.1% as on FY23E with healthy PCR of more than 65%.

Business momentum is on expected lines:

The bank is showing signs of stable risk –adjusted growth as sequential growth was multi-quarter high. RAM (Retail, Agriculture and MSME) boosted the growth, however, other segments are showing traction. The management alluded to a strong pipeline of sanctions and expects loan growth to be high. Conservatively, we estimate a credit CAGR of 7% – 8% in FY21-24. Moreover, we estimate the interest bearing liabilities to maintain the ratio of ~97.5% of interest earning assets. Factoring lower credit cost (decreasing provision expenses), we estimate FY23E ROA/ROE of 0.6% and 7.7%.

Outlook and Valuation:

PNB has one of the lowest “Price to book” among the large public sector banks. It is currently trading at 0.3x of FY23E book value. We expect the bank’s loan book to fatten cautiously at CAGR of 7% - 8% 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 0.6% and 7.7% in FY23E. We value the standalone entity at 0.4xFY23E BVPS (₹99) and value of associates and subsidiaries at Rs5 to arrive at a target price of ₹45.

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