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Reports mixed performance; elevated provisions dent earnings

Asset quality improves in 2QFY23

* PNB reported a mixed business performance in 2QFY23, with a 63% decline in PAT to INR4.1b (58% miss). However, PPOP grew 38% YoY to INR55.7b (in line). Domestic margin expanded by 21bp QoQ to 3.11%. NII/PPOP grew 16%/5% YoY to INR158b/INR109b in 1HFY23, while PAT fell 66% to INR7b. ? On the asset quality front, slippages were lower by 8% QoQ to INR60b (3.6% annualized). Healthy recoveries and steady upgrades led to a 79bp/48bp QoQ improvement in GNPA/NNPA ratio to 10.5%/3.8%. PCR grew by ~150bp QoQ to 66.3%.

* Restructured book moderated to INR139b (1.8% of loans) from INR147b (2% of loans) in 1QFY23. Total SMA overdue (over INR50m) was flat QoQ at 0.26% of domestic loans. In absolute terms, it rose 2% QoQ to INR20.7b.

* We cut our FY23/FY24 earnings estimate by 8%/2% as we build in higher provisioning and project a RoA/RoE of 0.4%/6.4% by FY24. We maintain our Neutral rating.

Operating performance in line; lower slippages support asset quality

* PAT fell 63% YoY, but rose 33% QoQ, to INR4.1b due to elevated provisioning of INR49b (10% miss). NII saw a 30% YoY growth to INR82.7b (in line) in 2QFY23, led by loan growth of 4% QoQ and an expansion of 21bp QoQ in domestic margin to 3.11%.

* Other income fell 13% YoY to INR28.5b due to muted treasury gains in 2QFY23 v/s INR8.8b in 2QFY22. OPEX dipped by 1% YoY to INR55.5b (9% miss), led by lower employee cost. The C/I ratio improved to 49.9% (v/s 58.3% in 2QFY22). PPOP grew 38% YoY to INR55.7b (in line).

* Loan book grew 15% YoY and 4.1% QoQ to INR7.7t, fueled by healthy traction across most segments. Retail/Agri grew 6.2%/5.3% QoQ, while the Corporate portfolio rose 1.6%. Within Retail, Personal/Vehicle/Housing loans surged 10.5%/4.4%/3.1% QoQ in 2QFY23.

* Deposits shot up 7% YoY and 5% QoQ to INR11.9t, led by 8%/2% QoQ growth in Term/CASA deposits. CASA ratio moderated to 44.9% from 46.3% in 1QFY23.

* On the asset quality front, slippages were lower by 8% QoQ to INR60b (3.6% annualized). Healthy recoveries and steady upgrades led to the GNPA/NNPA ratio improving by 79bp/48bp QoQ to 10.5%/3.8%. PCR rose by ~150bp QoQ to 66.3%.

* SMA-2 (above INR50m) book rose 2% QoQ to INR20.7b, but was flat QoQ in percentage terms at 0.26% of domestic loans. Total restructured book (COVID-19 and earlier schemes) improved to 1.8% (INR139b) in 2Q v/s 2% in 1QFY23 (INR147b).

Highlights from the management commentary

* The management has revised its credit growth guidance for FY23 upward to 12- 13% from 10% as there are ample opportunities to grow.

* While it is maintaining its single-digit GNPA guidance for FY23, it has revised its NNPA guidance downwards to 3% or lower from 3.5% earlier.

* It has revised its FY23 NIM guidance upward to 2.9-3%, an improvement of 10bp. NIM stood at 3.11% in 2QFY23.

Valuation and view

PNB reported a mixed business performance, with operating profit on expected lines, but a large miss on PAT due to elevated provisions. Healthy NII growth and steady OPEX were offset by a decline in treasury profit. Headline asset quality improved, supported by lower slippages, higher recoveries, and an increase in PCR. The restructured portfolio improved marginally to ~1.8% of loans. SMA overdue (with loans over 50m) was flat at 0.26% of domestic loans. We cut our FY23/FY24 earnings by 8%/2% as we build in higher provisioning and estimate a RoA/RoE of 0.4%/6.4% by FY24. We maintain our Neutral rating with a TP of INR40 (0.6x FY24E ABV).

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