PNB: Upsides capped as strong Q3 show, outlook reflected in valuations

Net interest income grew 12% YoY to Rs 10,300 crore as net interest margins improved 4 basis points QoQ to 3.15%

Punjab National Bank (PNB) reported a healthy Q3FY24. Net profit surged 254 per cent YoY to Rs 2,220 crore, while net interest income (NII) grew 12 per cent YoY to Rs 10,300 crore as net interest margins (NIMs) improved 4 basis points QoQ to 3.15 per cent. The loan book grew at 15 per cent YoY (3 per cent QoQ) to Rs 9.2 trillion. Retail loans declined 1.8 per cent QoQ. Deposit growth was relatively low at 9 per cent YoY (1 per cent QoQ) to Rs 13 trillion.

The credit deposit ratio is still low at 69 per cent which gives room for growth in advances. The CASA ratio increased 32 basis points QoQ to 42.5 per cent. Slippages dropped to Rs 1,800 crore (0.9 per cent annualized) leading to 72 basis points and 51 basis points decline QoQ in gross non-performing assets (GNPA) and net NPA ratios respectively to 6.24 per cent and 0.96 per cent respectively. The provisioning coverage ratio (PCR) rose 540 bps QoQ to 85 per cent.

These are all healthy indicators. The net profit rise of 254 per cent YoY was driven by lower provisions (down 42 per cent YoY,). NII grew 3.7 per cent QoQ, as NIMs also grew.  Other income declined 20 per cent to Rs 2,670 crore however with a treasury loss of Rs 790 crore in Q3FY24 versus gains of Rs 210 crore in Q3FY23.

The opex decreased 2 per cent YoY due to lower AS-15 provisions. As a result, the cost-income ratio declined to 51 per cent from 52 per cent in Q2FY24. The pre-provision operating profit (PPoP) grew 11 per cent YoY to Rs 6,330 crore in Q3FY24.

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The loan book grew 3 per cent QoQ with higher demand for corporate credit, Agriculture and MSME. Retail edged lower. The international book remained flat at 0.6 per cent up QoQ in Q3FY24. Deposits grew at a slower pace of 1 per cent QoQ to Rs 13.2 trillion, led by 6 per cent YoY and 1.7 per cent QoQ growth in CASA and fast growth in international deposits at 18 per cent YoY (4.5 per cent QoQ).

As mentioned, the credit-to-deposit is comfortable giving PNB headroom for credit expansion without having to raise bulk deposits. The asset quality improved with slippages down 25 per cent QoQ and GNPA and NNPA ratios improved as did the PCR. Stressed accounts such as SMA-2 (above Rs 5 cr and overdue for between 61-90 days) moderated 23 per cent YoY to Rs 1,340 crore and stood at 14 basis points of domestic loans. The bank expects recoveries at twice that of slippages.

The bank has made AS-15 provisions of Rs 322 crore and extra provisions of Rs 800 crore for a 17 per cent wage hike settlement. In Q2FY24, the bank had made provisions of Rs 690 crore. PNB is thus not raising bulk deposits and statutory liquidity ratio (SLR) is in excess of requirements. PNB expects the credit cost to be contained at under 1 per cent and expects return on assets at 1 per cent by Q4FY25. PNB has approval to raise Rs 12,000 crore, of which Tier 1 capital will be Rs 7,000 crore and Tier-2 will be Rs 5,000 crore. The cost of deposits increased by 10 basis points to 4.96 per cent.

The stock has performed well. It was up 17 per cent in the last month and up 105 per cent in the last year.  However, it may be close to fully-valued at the current price, leaving little room for the upside.