Buy Punjab National Bank Ltd for the Target Rs. 125 by Motilal Oswal Financial Services Ltd
NII below est. as NIMs decline; slippages rise QoQ
Business growth guidance steady
* Punjab National Bank (PNB) reported a 4QFY25 PAT of INR45.7b (up 52% YoY, in line), aided by better other income and a lower tax rate, partly offset by NII miss (as NIMs declined) and higher provisions.
* NII declined 2.5% QoQ (6% miss), while NIMs contracted 12bp QoQ to 2.81% (2.96% domestic NIMs).
* Loan growth was modest QoQ at 0.7% QoQ but healthy YoY at 15.3% to INR10.8t, led by growth in MSME and agri advances, while corporate stood flat QoQ. Deposits grew 14.4% YoY/2.4% QoQ. As a result, CD ratio declined 117bp QoQ to 68.8%.
* Slippages jumped 69% QoQ to INR30b from INR17.7b in 3Q, due to slippages from MSME and agri segments. GNPA/NNPA ratios moderated by 14bp/1bp QoQ to 3.95%/0.4%. PCR ratio was stable at 90.3%.
* We largely maintain our EPS estimates and expect RoA/RoE at 1.05%/15.5% in FY27E. We reiterate BUY rating on the stock with a TP of INR125 (based on 1.0xFY27E).
Margin bias downward for 1HFY26; C/D ratio reasonable at ~69%
* PNB reported a PAT of INR45.6b (up 52% YoY, in line), aided by better other income and a lower tax rate, partly offset by NII miss (as NIMs declined) and higher-than-expected provisions. FY25 PAT stood at INR166.3b (up 101.7% YoY). FY26E PAT is expected at INR194.5b (up 17% YoY).
* NII declined 2.5% QoQ (up 3.8% YoY) to INR107.5b (6% miss), as NIMs declined 12bp QoQ to 2.81%. Other income increased 11% YoY/38% QoQ to INR47.2b (20% beat), led by better fee income and write-back of SR provisions (INR13.25b).
* Opex increased 6% YoY/11.2% QoQ to INR86.9b (7% higher than MOFSLe). As a result, C/I ratio inched up to 56.2% (vs. 54.2% in 3Q). PPoP thus grew 5.6% YoY/2.3% QoQ to INR67.8b (7% miss on MOFSLe).
* Loan book grew by a modest 0.7% QoQ (15.3% YoY) to INR10.8t, led by better growth in MSME and agri advances, while corporate stood flat QoQ. PNB expects 11-12% YoY growth in FY26, with a focus on growing RAM segment.
* Deposits grew 14.4% YoY/2.4% QoQ to INR15.7t, led by healthy seasonal flows in CA deposits (up 7% QoQ). As a result, CASA ratio stood at 38% (down 17bp QoQ).
* On the asset quality front, slippages were high at INR30b vs. INR17.7b in 3QFY25 amid higher slippages in agri and MSME. GNPA/NNPA ratios moderated by 14bp/1bp to 3.95%/0.4%. The PCR ratio was stable at 90.3%.
* SMA-2 (above INR50m) declined to 0.02% of loans in 4QFY25 from 0.14% in 3QFY25.
Highlights from the management commentary
* Credit growth is projected at 11-12%, while deposit growth is expected around 10%, both likely to exceed projections.
* Bulk deposits totaled INR2.8t, primarily with tenures of 3 to 9 months. Cost of deposits is stable and new additions will be at lower rates.
* The total write-off book stands at INR920b, with expected recoveries of INR60– 70b.
* For 1H, NIMs should be at 2.8-2.9% and 2H NIMs shall be at 2.9-3.0%. In a downward interest rate scenario, yields will come down and any further rate cuts will further put pressure on yields.
Valuation and view: Reiterate BUY with a TP of INR125
PNB reported a moderate quarter, characterized by NII miss due to NIM decline and higher provisions, while other income was healthy. NII declined as NIMs contracted due to cost pressures. Business growth was moderate in 4Q; however, the bank outperformed its business growth guidance for FY25. 4Q saw a spike in slippages amid an increase in agri and MSME slippages, while asset quality ratios improved, led by better recoveries and write-off. SMA book (with loans over INR50m) improved to 0.02% of domestic loans. We largely maintain our EPS estimates and expect RoA/RoE at 1.05%/15.5% in FY27E. We reiterate BUY rating on the stock with a TP of INR125 (based on 1.0xFY27E).
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