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Progressing well, catching up with peers

Higher recoveries and lower opex feed into earnings beat   

Punjab National Bank’s (PNB) Q3 PAT at INR 22.2bn surpassed estimates on higher NII (supported by better recoveries) and curtailed opex (despite wage hike). Q3 was characterized by higher recovery (two large accounts, feeding into curtailed credit cost and benefiting NII) and the bank providing for wage revision (from 14% to 17%) and related pension cost. Asset quality sustained its improvement – PNB has already achieved its FY24 target of sub-1% NNPL – a commendable feat. While we note the improvement at PNB, it still scores lower than peers, albeit the gap is closing down.    

The key discussion hereon is whether there is further scope of improvement in core metrics or are these closer to the peak? Also, consistency in core PPOP is still not established and profitability is still soft (albeit improving). The return ratios RoE of 8-10% even by FY26E run lower than peers’. Not to mention, PNB runs at CET-1 of 9.9%, which may call for capital raise in the near-to-medium term.

Asset quality holding up, keenly monitor FY25 trajectory

PNB continued to deliver on improving asset quality with slippages curtailed at INR 17.9bn (sub-1%). This with sustained recovery led to further dip in GNPLs/NNPLs to 6.2%/0.96%, the lowest in the past many quarters, already achieving its FY24 target. While steady improvements were seen, the performance hereon will be the key monitorable given relatively lower recovery pool in FY25.         

Core performance – Volatility, a concern 

Q3 saw better NIMs (up 4bps QoQ, higher than our expectations, largely supported by benefit from two large recovery). This with steady loan growth (sub-3% QoQ) fed into 4% QoQ NII growth. With funding costs likely to rise, we believe strain on NIMs is likely. We believe core operational performance (excluding one-offs) may continue to lag and the road to recovery is long-winded.                   

Valuations: Recommend Sell; TP raised to INR 80

While performance seems to be improving, it was supported by higher recovery trends – Q3 reinforces our view. We believe improvement hereon may be contingent on persistent tailwinds. We introduce FY26E with roll-over to September 2025E, which feeds into raised TP of INR 80 (from INR 60, with raised multiple to 0.8x from 0.6x given better earnings). The outperformance of PNB has been sharper than our expectations, and the valuation multiples have converged with frontline peers. It now trades at 1.1x FY26E P/ABV, for an RoA/RoE of 0.6%/sub-10% even in FY26E – Maintain SELL.

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