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Strong quarter; asset quality surprises positively 

FY25 credit cost and GNPA guidance cut sharply

* Punjab National Bank (PNB) reported a 1QFY25 PAT of INR32.5b (8% beat), led by sharply lower provisions (67% YoY decline).

* NII grew 10.2% YoY to INR104.8b (in line), while NIM contracted slightly by 3bp QoQ to 3.07% (3.21% domestic).

* Opex declined 8.4% QoQ; however; was still higher than our estimate due to the PSLC charges. PPoP thus stood at INR65.8b (5% miss).

* Loan book grew 14% YoY (5.3% QoQ) to INR9.8t, led by a healthy traction in retail loans (5.4% QoQ growth). The C/D ratio inched up to 70%, which still remains lower than most peers. CASA mix moderated 136bp QoQ to 40.1%.

* Slippages increased marginally to INR17.6b (0.9% annualized), while healthy recovery and upgrades along with accelerated w-off enabled a sharp decline in GNPA/NNPA ratios by 75bp/13bp to 4.98%/0.6%. PCR improved 50bp QoQ to 88.4% in 1QFY25.

* We raise our EPS estimates by 5.6%/0.8% for FY25/FY26, factoring in lower provisions, healthy NII, and steady margins. We estimate an RoA/RoE of 1.0%/14.5% in FY26. Reiterate Neutral with a revised TP of INR135 (vs. INR130), premised on 1.1x FY26E BV. 

C/D ratio comfortable at ~70%, PCR improves further to 88% 

* PNB reported a PAT of INR32.5b (+159% YoY, 8% beat) amid a sharp decline in provisions (67% YoY decline, 43% lower than MOFSLe).

* NII grew 10% YoY (1% QoQ), while NIM contracted marginally by 3bp QoQ to 3.07%. Other income declined 15% QoQ to INR36.1b (in line), supported by both healthy fee income and treasury gains of INR5.8b in 1QFY25.

* Opex increased 8% YoY (declined 8.4% QoQ as the bank provided for AS-15 wage provision in 4QFY24), though it stood 7% higher than MOFSLe as PNB purchased PSLC worth INR5.58b in 1QFY25. As a result, the C/I ratio stood elevated at 53% (vs. 56% in 4Q). PPoP thus grew 10% YoY to INR65.8b (5% miss vs. MOFSLe).

* Loan book grew at a healthy 13.9% YoY (5.3% QoQ) to INR9.8t, amid continued traction in Retail, Agri, MSME, as well as the corporate segments. Retail growth was strong at 5.4% QoQ. PNB guided a healthy traction in credit growth at 11-12%, led by RAM segment.  

* Deposits grew 8.5% YoY (2.8% QoQ) to INR14.1t, led by healthy traction in TDs/international deposits at 24% YoY/5.5% QoQ. CASA ratio thus moderated to 40.1% from 41.4% in 4QFY24.

* On the asset quality front, slippages moderated 20% QoQ to INR17.5b (0.9% annualized). GNPA/NNPA stood at 4.98%/0.6%. PCR rose to 88.4%.

* SMA-2 (above INR5

Highlights from the management commentary 

* NIM (domestic) stood at 3.21%, NIM (global) was 3.07% in 1QFY25. NIM guidance is 2.9-3.0%. The bank will aim for NII improvement in every quarter.

* Management expects GNPA/NNPA ratio to be below 4.0%/0.5% by FY25.

* About INR5.58b was spent for the purchase of PSLC, and therefore, opex rose. However, this is a non-recurring expense.

* About INR30b+ recovery from NCLT is expected for FY25, which is normally corporate in nature. 

Valuation and view: Reiterate Neutral with a revised TP of INR135 

PNB reported a healthy quarter characterized by a sharp decline in provisions. NII broadly stood in line, while NIM contracted marginally in 1QFY25. PPoP witnessed a slight miss amid higher opex in 1Q on account of PSLC costs. Advances growth was robust, and management aims to improve its share in the RAM portfolio, which will support margins. Asset quality continues to witness a sharp improvement as recoveries and w-off continued to stay at higher levels. PCR thus improved further to 88%, while asset quality ratios also improved. SMA overdue (with loans over INR50m) remained under control at 0.16% of domestic loans, while the bank continues to guide robust recoveries at 2x of slippages. Thus, it guided GNPA ratio to decline to ~4% (earlier guidance of 5%), while credit cost is guided at 0.5% (earlier guidance at 1%). We raise our EPS estimates by 5.6%/0.8% for FY25/FY26, factoring in lower provisions, healthy NII, and steady margins. We estimate an RoA/RoE of 1.0%/14.5% in FY26. Reiterate Neutral with a revised TP of INR135 (vs. INR130), based on 1.1x FY26E BV. 

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