Buy Punjab National Bank Ltd for the Target Rs.130 by Motilal Oswal Financial Services Ltd
NII in-line; transition to new tax regime drags earnings
Margin contracted 11bp QoQ
* Punjab National Bank (PNB) reported 1QFY26 PAT of INR16.7b (48% YoY decline, 60% miss) amid higher taxes. The bank opted for the new tax regime, incurring a one-time charge of INR33.24b.
* NII remained broadly flat YoY/declined 1.7% QoQ to INR105.8b (in-line), while NIMs contracted 11bp QoQ to 2.7% (2.84% domestic NIMs).
* Other income grew 46% YoY (11.7% QoQ) to INR52.7b (21% beat) amid better fee income and robust treasury gains.
* Loan book grew 11% YoY (1.3% QoQ), while deposits grew 12.9% YoY (1.5% QoQ). As a result, the CD ratio stood broadly stable at 68.7%.
* Slippages stood at INR18.9b vs INR17.6b in 1QFY25. GNPA/NNPA ratios improved 17bp/2bp to 3.78%/0.38%. PCR ratio stood at 90.3%.
* We cut our earnings estimates by 12% for FY26 and estimate RoA/RoE at 1.0%/15.2% in FY27. Reiterate BUY with a TP of INR130 (1.0x FY27E ABV).
Business growth modest; asset quality improves further
* PNB reported a PAT of INR16.7b (48% YoY decline, 60% miss) amid higher taxes. Adj. PAT stood at INR49.9b (54% YoY growth).
* NII remained broadly flat YoY/declined 1.7% QoQ to INR105.8b (in-line), while NIMs contracted 11bp QoQ to 2.7%. Other income grew 46% YoY (11.7% QoQ) to INR52.7b (21% beat). Treasury income stood at INR16b vs INR9.2b in 4QFY25.
* Opex increased 17% YoY/remained flat QoQ at INR87.6b (6% higher than MOFSLe), driven by the bank’s purchase of PSLCs for the priority sector. C/I ratio moderated 90bp QoQ to 55.3%.
* PPoP, thus, grew 7.6% YoY to INR70.8b (6% beat). Provisions declined 75% YoY/10% QoQ to INR3.2b (65% lower than MOFSLe).
* Loan book grew 11% YoY (1.3% QoQ) to INR10.9t, led by better growth in MSME advances (4% QoQ), while Retail and Corporate grew 1.1% QoQ each.
* Deposits grew 12.9% YoY/1.5% QoQ to INR15.9t. CASA ratio stood at 37% (down 96bp QoQ). CD ratio remained broadly stable at 68.7%.
* On the asset quality front, slippages stood at INR18.9b vs INR17.6b in 1QFY25. GNPA/NNPA ratios improved 17bp/2bp to 3.78%/0.38%. PCR ratio stood at 90.3%. SMA-2 (above INR50m) stood at 0.15% of loans vs 0.02% in 4QFY25.
Highlights from the management commentary
* With the adoption of the new tax regime, the bank expects to save INR7b every quarter, resulting in a total net profit accretion of INR21b for FY26.
* Bulk deposits stood at INR2.8t. The bank has reduced rates on bulk deposits by 100bp, bringing them down to ~6.7%. These deposits will be repriced in 2Q, with the full impact expected to be visible from 3Q onwards.
* In 2QFY26, the bank expects NIMs to remain at 1Q levels, supported by the shedding of low-yielding advances and the benefit from lower deposit costs beginning to reflect.
* 56% of the loan book is EBLR-linked, 30% is MCLR-linked, and the remaining comprises fixed-rate and other instruments.
Valuation and view: Reiterate BUY with a TP of INR130
PNB has transitioned to the new tax regime, resulting in a one-time impact on earnings. However, this shift will be beneficial from 2Q onwards, with the effective tax rate moderating to 25%. NIMs contracted 11bp QoQ, though the bank expects improvement from 3Q onwards. Business growth remained modest, with management guiding for 11-12% growth for FY26. Asset quality improved sequentially, with slippages moderating; however, the SMA book (with loans over INR50m) increased to 0.15% of domestic loans. We cut our earnings estimates by 12% for FY26 and estimate RoA/RoE at 1.0%/15.2% in FY27. Reiterate BUY with a TP of INR130 (1.0x FY27E ABV).
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