PNB rating: Reinstate ‘reduce’ with a fair value of Rs 33

Among the PSU banks undergoing mergers, PNB’s relatively higher CET-1 and CASA ratio stand out.

Low NPLs, high credit costs. PNB reported a sharp decline in earnings led by provisions for bad loans, even as operational performance was broadly stable. Low CET1 remains an issue due to the risk of book-value dilution and imminent rise in credit costs because of high share of moratorium. We reinstate coverage on the stock with a ‘reduce’ rating and Rs 33 fair value, as we think SBI (buy) and BoB (add) offer better margins of safety within PSU banks.

PNB reported its first quarterly results after merger of OBC and Allahabad Bank with it. On a like-for-like basis, the bank reported earnings decline of ~75% YoY due to elevated provisions. Operating profit grew 3% yoy, led by NII and total revenue growth of 8% but offset by higher operating expense growth of 14% (partly for wage revisions). Non-interest income growth was supported by treasury gains while core fee income declined 5% yoy. Cost-income declined to 49%, but we would wait for a few more quarters to see the impact of the merger. NIMs were stable at 2.5% as lower cost of funds offset higher liquidity (loan-deposit ratio). CASA ratio is relatively better versus peers at 43% of domestic deposits, leading to cost of funds at 4.9%.

GNPL of 14.1% (+30 bps QoQ) and NNPL of 5.4% (-10 bps QoQ) were the lowest since FY2015 with NPL coverage improving to 65% (+150 bps QoQ). Slippages expectedly were low at 1.4% but credit costs remained elevated at 3.2%. Headline moratorium book was ~30% of overall loans, spread across parts of the book – retail (26%), agri (33%), MSME (38%) and corporate (26%). The credit-cost trajectory over the medium term remains unclear due to the restructuring window and its ability to revive stressed exposures. We continue to build elevated slippages and credit costs. The bank has made negligible Covid-related provisions so far but CET-1 ratio at 9.4% is relatively better among the PSU banks.

We reinstate coverage on PNB with a ‘reduce’ rating and fair value of Rs33, valuing the bank at 0.5X June 2022E book for RoEs of ~10% over the medium term. Among the PSU banks undergoing mergers, PNB’s relatively higher CET-1 and CASA ratio stand out. A key downside risk is to the book value per share as dilution risk is still high. Over the medium to long term, the merger allows PNB to consolidate its position in North and capitalise on Allahabad Bank’s presence in Eastern India. At the current juncture, we find risk-reward more favourable for SBI and BoB among the PSU banks.