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Sees a recovery in operating performance; remains watchful of asset quality

Slippages remain elevated

* PNB reported a healthy performance, supported by a pick-up in NII and lower opex, even as provisions stood stable sequentially. Business growth remains under pressure, with a sequential decline in loans/deposits. However, margin witnessed ~5bp QoQ improvement to 2.73%.

* Slippages stood elevated (~6.2% annualized), led by the RAM segment. However, higher recoveries and upgradations limited the decline in asset quality ratios. Total restructured book stands ~2.02% of loans, while total SMA 1 and 2 stands elevated at 3.9%. While we expect asset quality outlook to improve, led by moderation in slippages/credit cost, subdued loan growth, higher SMA, and restructuring book keeps us watchful over the near term. We estimate a RoA/RoE of 0.6%/8.8% by FY23E and resume coverage with a Neutral rating.

Business growth muted; operating performance showing a recovery

* PNB reported a PAT of INR10.2b (+232% YoY/75% QoQ), aided by pick-up in NII, lower opex, and controlled provisions. NII grew 6.6% YoY and 4% QoQ to INR72.3b, with margin expanding by 5bp QoQ to 2.73%.

* Core fee income was flat YoY, but grew 8% QoQ to INR15b. Total other income stood at INR35.9b supported by higher treasury gains (INR11.2b) and recovery from written of assets (INR8.3b).

* Opex declined by ~8% YoY to ~INR47.2b, resulting in a 360bp QoQ moderation in C/I ratio to 43.6%. Thus, PPOP grew 16% YoY to INR61b.

* On the business front, loan growth was flat YoY (~2% QoQ decline) to ~INR6.6t, with Retail/MSME/Corporate declining by 2.7%/~4%/5% QoQ. Agri book though grew 13% QoQ. Deposit growth stood weak ~2% YoY (~1% QoQ decline), while CASA grew 7% YoY. CASA mix stood ~45.2% (- 33bp QoQ).

* Slippages stood elevated at INR101.7b (annualized 6.2% of loans), led by RAM segment. However, higher recoveries and upgradations limited the deterioration in asset quality. The GNPA/NNPA ratio increased by 21bp/11bp QoQ to 14.3%/5.8%. PCR stood stable at 62.9%.

* SMA 2 (above INR50m) book stood at 1.7% of loans, while total SMA 1 and 2 book stood at INR260b (3.9% of loans). Total restructured loans stood at INR133.9b (2.02% of loans)

Highlights from the management commentary

* The bank is targeting a loan growth of 8-10%. It expects to post a profit of INR40-60b in FY22. Credit cost is likely to remain ~1.5% in FY22.

* Slippages breakup: Retail (INR15.48b), Agri (INR21.49b), MSME (INR31.22b), and others (INR14.22b).

* Total slippages are likely to remain at INR180-200b in FY22.

Highlights from the management commentary

* The bank is targeting a loan growth of 8-10%. It expects to post a profit of INR40-60b in FY22. Credit cost is likely to remain ~1.5% in FY22.

* Slippages breakup: Retail (INR15.48b), Agri (INR21.49b), MSME (INR31.22b), and others (INR14.22b).

* Total slippages are likely to remain at INR180-200b in FY22.

Valuation and view

PNB reported a healthy performance, supported by a pick-up in NII, higher other income, and lower opex, even as provisions stood stable QoQ. Business growth remains muted, however margin witnessed a sequential uptick. The bank expects growth to pick up, led by RAM segments, while the Corporate book too would undergo a gradual recovery.

Asset quality was largely stable, despite higher slippages, supported by recoveries and upgrades. SMA 1 and 2 book stands elevated at 3.9% of loans, while restructured book, at 2.02% of loans (expect a further restructuring of INR15-20b), keeps us watchful over the near term. We estimate a RoA/RoE of 0.6%/8.8% by FY23E. We resume coverage with a Neutral rating and a TP of INR45 (0.6x FY23E ABV).

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