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Punjab National Bank (PNB) has consistently been reporting robust earnings since many quarters. The wholesale book has cleaned up significantly and further recoveries are expected in FY24E. Additionally, the bank’s credit growth was robust in FY23 and expected to be in same trajectory for FY24E. We expect the bank’s NIMs to stay intact as MCLR book (35%) re-pricing in underway. Our investment thesis is based on 1) Easing corporate stress with higher recovery, 2) Risk adjusted growth and 3) An “in-expensive” valuation. A bad loan recovery and sell off to NARCL may clean up the balance sheet with NPA normalization. Furthermore, steady credit growth along with lower credit cost is likely to boost the return ratios; which makes the stock rewarding at in-expensive valuation (0.7x 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 14 quarters with an exception of 1QFY22 as NPA recognition resumed. Slippages during the previous quarter were curtailed at ?40bn (~3% v/s run-rate of 8% over last four quarters); this restricted GNPA/NNPA to 8.7%/2.7% (v/s 16.3%/7.2% fourteen quarters ago). The headline numbers clearly suggesting a steady improvement driven by higher recovery and write-offs. In FY23, 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 for and management believes it may be transferred at 25%. NARCL will make payments using a combination of cash and Security Receipts (SRs). A further recovery of ?5bn and ?13bn in 1QFY24 and 2QFY24 respectively. This may aid PNB’s equity capitalposition in the interim (CET1 currently at 12.7%). Management guidance is quite affirmative and it expects GNPA and NNPA ratio to reduce further in FY24E with credit cost guidance of 1.5%. Under base case scenario, we estimate the NNPA to be at 2.6% as on FY24E with  healthy PCR of more than 73%.

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