Buy Punjab National Bank Ltd for the Target Rs.140 by Motilal Oswal Financial Services Ltd
Margin expands 8bp QoQ; lower LLP drives earnings beat
Asset quality improves – ECL transition requirement lowered
* Punjab National Bank (PNB) reported 2QFY27 PAT of INR55.3b (up 13% YoY/5% QoQ, a 7% beat on MOFSLe), driven by lower provisions and other income.
* NII grew 11% YoY (up 7% QoQ) to INR116b (4% beat), led by a global NIM expansion of 8bp QoQ to 2.58%.
* Loan book grew 16% YoY (6% QoQ), while deposits grew 10% YoY (3% QoQ). CD ratio increased to 74% from 72% in 1QFY27. ? Slippages increased to INR23.4b from INR20.8b in 1QFY27 due to a slippage in the corporate segment (road account). GNPA/NNPA ratios declined 23bp/3bp QoQ to 2.55%/0.25%. PCR ratio remained stable at 90.3%.
* We tweak our earnings estimates by +1%/+1.4% for FY27/FY28, and estimate FY27E RoA/RoE of 1.05%/15.5%. Reiterate BUY with a revised TP of INR140 (premised on 1x FY28E ABV).
NIM to expand ~7-9bp sequentially; RoA guided at >1%
* PNB reported a PAT of INR55.3b (up 13% YoY/5% QoQ, 7% beat) amid lower provisions.
* NII grew 10.8% YoY/7.4% QoQ as global NIM expanded 8bp QoQ to 2.58%. The NIM expansion was led by a decline in cost of deposits (down 3bp QoQ to 4.96%), driven by the retirement of high cost liabilities using FCNR (b) mobilization, while yield on advances improved 7bp QoQ to 7.6%, with a focus on moving to higher yielding assets.
* Other income declined 17% YoY to INR36b amid lower treasury and fee income.
* Opex rose 1.1% YoY/0.8% QoQ to INR76.7b (in line with MOFSLe) amid lower employee costs of INR44b. C/I ratio, thus, declined 75bp YoY/rose 15bp QoQ to 50.5%.
* PPoP largely stood flat QoQ (up 4.2% YoY, largely in line). Provisions declined 82% QoQ, led by a write-back of INR7.9b on one standard account, while additional standard provisions of INR1.25b were made to support the ECL transition.
* The bank revised its one-time ECL transition impact to ~INR80b, while targeting a sustained RoA of 1% and a steady-state credit cost of ~0.25% to 0.3%.
* The loan book grew 16% YoY (6% QoQ) to INR13.1t amid broad-based growth in corporate (3.8% QoQ), agri (5.9% QoQ), and MSME loans (5.7% QoQ). Retail (incl. IBPC) grew 16.3% YoY/5.6% QoQ.
* Deposits grew 10% YoY/3% QoQ to INR17.7t. CASA ratio declined to 36.6% (down 14bp QoQ). The CD ratio, thus, increased to 73.7%.
* On the asset quality front, slippages increased 15.1% QoQ to INR23.95b due to a slippage in a corporate segment – road account. GNPA/ NNPA ratios, thus, declined 23bp/3bp QoQ to 2.55%/0.25%, while PCR ratio was stable at 90.3%.
Highlights from the management commentary
* Management revised its estimated one-time ECL transition requirement to ~INR80b from INR90–100b previously, with the residual requirement indicated at INR43–50b.
* The incremental steady-state credit-cost impact from ECL was indicated at ~15bp, with overall credit costs expected at 25–30bp.
* Around 56% of the loan book is repo-linked and reprices the following day. The bank expects 25bp repo rate hike to support NIM by 7–9bp and yield on advances by ~10bp in the coming quarter.
* SMA-0 stood at INR169.6b/1.26%, SMA-1 at INR74.6b/0.56%, and SMA-2 at INR89.8b/0.67%.
* Average gold loan yield stood at 8.6%, with management expecting an increase to 8.75–8.90%. Agri gold loan book stood at 94% of the total gold loan portfolio
Valuation and view: Reiterate BUY with a revised TP of INR140
PNB reported a strong quarter, with earnings beat led by controlled provisions and opex, while margins expanded 8bp QoQ. Provisions came in lower, reflecting strong asset quality, even as they created additional standard asset provisions to facilitate a smoother transition to ECL. The bank lowered its one-time ECL impact guidance to ~INR80b. Asset quality trends remained healthy, with marginal uptick in slippages driven by a single infrastructure corporate account and no significant stress elsewhere in the portfolio. Management guided for RoA of >1% and credit cost of 0.25–0.30% We estimate FY27E RoA/RoE of 1.05%/15.5% and reiterate our BUY rating with a revised TP of INR140 (premised on 1x FY28E ABV).
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