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Asset quality continues to surprise positively

-      Punjab National Bank (PNB) reported a healthy quarter, with a 19% beat on PAT amid 23% lower provision vs. our estimate. PAT surged 254% YoY to INR22.2b, while NII grew 12% YoY (in line) to INR103b as NIMs improved 4bp QoQ to 3.15% in 3QFY24.

-      Loan book grew at a healthy pace of 15% YoY (3% QoQ) to INR9.2t, led by a healthy traction in corporate. Retail loans declined 1.8% QoQ. Deposit growth was relatively low at 9% YoY/1% QoQ to INR13t.

-      The C/D ratio was relatively low at 69%, giving levers to accelerate advances unlike other banks. The CASA ratio increased 32bp QoQ to 42.5%.

-       Slippages dipped to INR18b (0.9% annualized) enabling sharp 72bp/51bp QoQ decline in GNPA/NNPA ratios to 6.24%/0.96% while PCR rose 540bp QoQ to 85%.

-      We upgrade our EPS estimates by 15%/5% for FY24/FY25, factoring in lower LLP and healthy margins. We estimate RoA/RoE of 0.7%/11.0% in FY25 and 0.9%/13.1% by FY26. Retain Neutral with a TP of INR100 (1x Sep’25E ABV).

NIMs improve 4bp QoQ to 3.15%; PCR jumps to 85%

-      PNB reported a PAT of INR22.2b (+254% YoY, 19% beat) amid lower provisions (down 42% YoY, 23% lower than our estimate). NII grew 12% YoY (3.7% QoQ), aided by a 4bp QoQ improvement in NIMs to 3.15%.

-      Other income declined 20% YoY (down 12% QoQ, 22% miss) to INR26.7b, as the bank reported a treasury loss of INR7.9b in 3QFY24 vs. gains of INR2.1b in 3QFY23.

-      Opex decreased 2% YoY as additional wage provisions were offset by lower AS-15 provisions. As a result, the C/I ratio declined to 51% (vs. 52% in 2QFY24). PPoP, thus, grew 11% YoY to INR63.3b (in line) in 3Q.

-      The loan book grew by a healthy 15% YoY (+3% QoQ) to INR9.2t amid healthy traction in Corporate, Agri and MSME. Retail edged lower by 1.8% QoQ. The international book remained flat at 0.6% QoQ in 3QFY24.

-      Deposits grew at a slower pace of 9% YoY (1% QoQ) to INR13.2t, led by 6% YoY/1.7% QoQ growth in CASA and faster growth in international deposits at 18% YoY/4.5% QoQ. Thus, the CASA ratio rose to 42.5% from 41.2% in 2QFY24.

-      On the asset quality front, slippages declined 25% QoQ to INR18b (0.9% annualized). GNPA/NNPA ratios improved 72bp/51bp QoQ to 6.24%/1%. PCR increased 540bp QoQ to 85.4%.

-      SMA-2 (above INR50m) moderated 23% YoY to INR13.4b and stood at 14bp of domestic loans.

Highlights from the management commentary

-      The bank made AS-15 provisions of INR3.22b and extra provisions of INR8b for a 17% wage hike settlement. PNB has been making provisions for pensions and has increased liability provisions. In 2Q, the bank made provisions of INR6.9b for the wage revision.

-      The C/D ratio stands at a comfortable level of 69.2%. PNB is thus not raising bulk deposits. It also has excess SLR.

-      Slippage breakup – Agri at INR 4.39b, MSME at INR7.09b, Retail at INR 4.34b, Others at 0.13b and INR1.98b were slippages from existing NPAs. The bank expects recoveries to be at 2x of slippages.

Valuation and view

PNB reported a robust quarter as lower-than-expected provisions drove earnings and asset quality continued to improve. NII growth was healthy QoQ, supported by steady margins and healthy growth in RAM segments. Asset quality improvement was aided by lower slippages and healthy recoveries. PCR improved further to 80%. SMA overdue (with loans over INR50m) remains under control at 0.14% of domestic loans, while the bank continues to guide for robust recoveries at 2x of slippages. PNB expects the credit cost to be contained at <1% and expects RoA at 1% by 4QFY25. We upgrade our EPS estimates by 15%/5% for FY24/FY25, factoring in lower LLP and healthy margins. We estimate RoA/RoE of 0.7%/11.0% in FY25 and 0.9%/13.1% by FY26. Retain Neutral with a TP of INR100 (premised on 1x Sep’25E ABV).

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