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Strong quarter; asset quality improves sharply

Credit cost guidance reduces further to ~30bp

* Punjab National Bank (PNB) reported a healthy 2QFY25 PAT of INR43.04b (24% beat), led by a sharp decline in provisions (92% YoY decline).

* NII grew 6% YoY to INR105.2b (4% lower than MOFSLe), while NIM contracted 15bp QoQ to 2.92% (3.06% domestic NIMs), partly due to reclassification of penal interest charges.

* Opex grew 9.7% QoQ (15% higher than MOFSLe), due to the creation of AS15 employee provisions in 2Q. PPoP thus stood at INR68.5b (4% miss).

* Loan book grew 15% YoY (3.6% QoQ) to INR10.2t, led by continued traction in retail loans at 15% YoY/ 6.6% QoQ. Deposits grew 11.3% YoY/3.6% QoQ. As a result, the C/D ratio was broadly maintained at 70%.

* Slippages increased marginally to INR21.8b (1% annualized), while healthy recovery and upgrades enabled a sharp decline in GNPA/NNPA ratios by 50bp/14bp to 4.48%/0.5%. PCR improved 174bp QoQ to 90.2% in 2QFY25.

* We raise our EPS estimates by 8.9%/4.9% for FY25/FY26, factoring in a sharp reduction in provisions. We estimate RoA/RoE at 1.0%/14.1% in FY26. Reiterate Neutral with a revised TP of INR120 (based on 1.0x FY26E ABV).

C/D ratio comfortable at ~70%, PCR improves further to 90%

* PNB reported a PAT of INR43b (+145% YoY, 24% beat) amid a sharp decline in provisions (83% lower than MOFSLe). For 1HFY25, PAT stood at INR75.5b (151% YoY). PNB’s 2HFY25 PAT is expected at INR80.9 (55% YoY).

* NII grew 6% YoY/was flat QoQ, while NIM contracted sharply by 15bp QoQ to 2.92%. Other income jumped 27% QoQ to INR45.7b (33% beat to MOFSLe) amid better recovery from w-off account and treasury income.

* Opex grew 22% YoY/9.7% QoQ due to the creation of AS-15 wage-related provisions. As a result, the C/I ratio increased to 54.6% (vs. 53.3% in 1Q). PPoP grew 10% YoY to INR68.5b (4% miss).

* Loan book rose 14.6% YoY/ 3.6% QoQ to INR10.2t, amid healthy traction in retail and MSME, and faster growth in international book. PNB guided a healthy traction in credit growth at 11-12% led by the RAM segment.

* Deposits grew 11.3% YoY (3.6% QoQ) to INR14.6t, led by healthy traction in TDs at 4.7% QoQ and international deposits at 9.4% QoQ. CASA ratio thus moderated to 39.3% from 40.1% in 1QFY25.

Highlights from the management commentary

* Global NIM stood at 2.92% for 2QFY25. NIM guidance is at 2.9-3.0%; the bank will aim for NII improvement in every quarter.

* The bank expects GNPA and NNPA ratios to be ~3.5-3.75% and below 0.5%, respectively, by FY25.

* PNB aims to bring RAM to 58% by Mar’25 and 60-61% in the next 2-3 years.

* The bank guides credit costs of 0.25%-0.30% for FY25, while RoA to sustain at 0.9%-1.0%.

* On the asset quality front, slippages increased by 24% QoQ to INR21.8b. However, better recoveries and upgrades led to 50bp QoQ reduction in GNPA ratio to 4.5%; NNPA ratio stood at 0.5%. PCR improved to 90.2%.

* SMA-2 (above INR50m) inched up 32% QoQ to INR21.3b and stood at 20bp of domestic loans.

Valuation and view: Reiterate Neutral with a revised TP of INR120

PNB reported a healthy quarter characterized by a sharp decline in provisions and healthy loan growth. NII stood broadly flat QoQ, while NIM contracted 15bp QoQ. PPoP witnessed a slight miss amid higher opex in 2Q on account of the creation of AS-15 employee provision. Management aims to increase the mix of RAM portfolio, which should result in steady margins. Asset quality continues to surprise with PNB seeing healthy recoveries and upgrades, resulting in the PCR to improve to 90%. SMA overdue (with loans over INR50m) saw a marginal increase to 0.2% of domestic loans, while the recovery guidance continues to be at 2x of slippages. Thus, it guided the GNPA ratio to decline to ~3.5-3.75% (earlier guidance of 4%), while credit cost is guided at 0.25-0.3% (earlier guidance at 0.5%). We raise our EPS estimates by 8.9%/ 4.9% for FY25/FY26, factoring in a sharp reduction in provisions, we estimate an RoA/RoE of 1.0%/14.1% in FY26. Reiterate Neutral with a TP of INR120, based on 1.0x FY26E ABV.

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