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PNB reported a better-than-expected PPoP, supported by in-line NII and higher treasury gains, although partly offset by higher opex (including PSLC cost). However, a one-off deferred tax write-off of Rs33.2bn due to the shift to the new tax regime resulted in a lower net profit of Rs16.8bn (vs our estimated Rs41bn) in Q1FY26. Ahead, the bank’s effective tax rate is expected to reduce to ~25% vs ~35% earlier, and keep RoA above 1%. Credit growth moderated to ~11% YoY in Q1FY26; the bank, however, expects growth to be around 11- 12% in FY26. NIM contraction was limited (as seen across PSBs) at 11bps QoQ to 2.7%; the bank expects NIM to remain broadly stable in Q2FY26 and improve thereafter as cost-benefits seep in. We trim FY26E earnings by ~5% due to the DTA impact, while raising FY27E earnings by 3% on benefit from the lower tax rate. Factoring in reasonable RoA/RoE of ~0.9-1%/~14% and cheap valuations at 0.8x Jun-27E ABV, we retain BUY with an unchanged TP of Rs130.

Slower growth, albeit relatively resilient margins

PNB reported moderate credit growth of ~11% YoY/1.3% QoQ, from ~15% in Q4FY25, driven by slower growth across retail (11.8% YoY), agriculture (6.2% YoY), and corporate (7.6% YoY) segments. Deposit growth remained moderate at ~13% YoY/1.5% QoQ, with the CASA ratio declining by 83bps QoQ to 35.8%. The LDR ratio remains stable at 69%, with scope for improvement. NIM declined by 11bps QoQ (vs peers’ contraction at 7-18bps) to 2.7%, mainly due to a 22bps drop in loan yields. The management expects credit growth around 11-12% and deposit growth at 9-10%; NIM to remain at ~2.7% in Q2, with improvement likely from Q3, supported by deposit repricing and CRR-related benefits.

Lower slippages drive improvement in GNPA

Gross slippages declined to Rs18.9bn/0.8% of loans which coupled with higher write-offs led to 17bps QoQ reduction in the GNPA ratio to 3.8%. The specific PCR remained stable and healthy at 90%, leading to a lower NNPA ratio at ~0.4%. However, SMA-2 increased slightly to ~Rs16bn, ie 0.15% of loans vs 0.02% in Q4FY25. The management does not see any stress in the MSME segment, as exposures are secured either by collaterals or covered under CGFMU while incremental slippages in MSME remain at 2.5–3.0%. The management guided for overall slippages below 1% and recoveries of Rs160bn, with Rs60bn recoveries from written-off accounts. Ahead, the bank expects asset quality to trend well which should keep credit cost lower.

We retain BUY with a TP of Rs130

Factoring in reasonable RoA/RoE of ~0.9-1%/~14% and cheap valuations at 0.8x Jun27E ABV (adjusted for subsidiary/investment value of Rs10/sh), we retain BUY with an unchanged TP of Rs130. Key risks: Macro deterioration derailing growth, asset-quality normalization, and ECL implementation.

Key Concall takeaways

Outlook on loans, deposits, and margin

• The bank targets 11-12% loan growth and 9-10% deposit growth in FY26, with the creditdeposit (CD) ratio expected to improve to 73% by Mar-26 (from the current 69%).
• The bank has sanctioned corporate loans totalling Rs1.3trn, of which Rs0.4trn remains in the pipeline. These are primarily project finance loans across sectors such as power, renewables, smart metering, InvITs, REITs, and food processing, and are expected to be disbursed in Q2 and Q3.
• The growth momentum in RAM (Retail, Agriculture, and MSME) segments is expected to continue. The bank aims to enhance disbursement turnaround time through digital initiatives.
• Loan mix - Repo - 47%, MCLR - 30%, T-bill linked - 9%, Fixed - 7.8%, Others - 6.2%.
• NIMs are expected to improve from Q3, supported by deposit repricing (~100bps reduction in bulk TD rates, from 7.85-7.9% to 6.85-6.9%) and the benefit from CRR cut. Accordingly, the bank guided for FY26 NIM at 2.8-2.9%.
• Loan yields stand at 8.6% for retail, 8.82% for agriculture, and 10.12% for MSME segments. MCLR has been reduced by 15bps to 8.90%.

Asset quality

• The bank targets to keep its GNPA ratio 96%. Credit cost is guided to remain Rs1mn continue to perform well. Slippages on incremental MSME lending remain contained at 2.5-3%.
• The overall SMA book declined to 6.14%, from 6.9%.
• The total SMA exposure stands at Rs690bn, comprising Rs430bn in SMA-0, Rs133bn in SMA-1, and Rs12.7bn in SMA-2. Segment-wise: MSME - Rs240bn; Agri - Rs52bn; Retail - Rs17.8bn.
• In Q1, recoveries from written-off accounts stood at Rs17bn, and interest recovery was Rs5bn.

Others

• Operating expenses were elevated in Q1 due to PSLC purchases amounting to Rs8.5bn. Operating expense run-rate is guided at Rs80-88bn for the next few quarters.
• The bank has waived off minimum balance charges across savings accounts.
• The bank has migrated to the new tax regime (effective rate at 25% vs 35% earlier), which is expected to enhance RoA by ~16bps, translating to tax savings of Rs21bn.

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