Punjab National Bank (PNB) reported Q3FY22 PAT of Rs 11.3 billion, in line with our estimate. While core profitability improved, part of it was driven by recovery of one lumpy account (aviation), excluding which underlying remains soft. Headline asset quality improved, but high SMA-2 + restructured + ECLGS reflects persistent challenges.
Evolving stress and a low provision stock forebode elevated credit costs, keeping us on guard. High stress, lower buffer, challenges on business and risk of subsequent Covid waves indicate that normalisation is still some time away. Factoring in lower credit cost, we are raising FY22/FY23e BVPS by 1%/2%. This along with a rollover to Jun-23E yields a TP of Rs 44 (earlier Rs 42). Maintain ‘Hold’.
Asset quality steady, underlying render outlook challenging: Slippages during quarter were curtailed at Rs 50 bn (sub-3% versus run-rate of 8% over last three quarters); this restricted GNPLs/NNPLs to 12.9%/4.9% (versus 13.6%/5.5% in Q2FY22). While headline numbers suggest a steady improvement, a few issues keep us on guard. Meanwhile asset quality challenges would persist.
Core earnings momentum supported by one-off recoveries: Business momentum is along expected lines—loan book growth of sub-3% and deposit growth of 1.1% q-o-q – significantly lagging peers. However, NIM improvement to 2.93% (>50bp q-o-q rise), largely supported by one-off recovery (aviation account), supported overall revenue momentum.
Outlook: Uncertainty persists – A weak core earnings profile, operational issues and a diluted franchise render PNB a structurally challenged investment proposition. Furthermore, the merger brings its own complexities and remains a key variable to watch out for. Maintain ‘HOLD/SU’.
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