PNB shares at Rs 45 or Rs 70? Asset quality ratios improve but elevated opex mars Q1 earnings

Punjab National Bank Ltd (PNB) June quarter results lacked the element of positive surprises, as elevated opex cost (due to increased staff costs) and credit cost weighed on earnings. Share price targets on the stock suggests limited potential upside for the stock ahead.

Nirmal Bang Institutional Equities said PNB’s June quarter performance was lower than its expectations, with NII being in line and pre-provision operating profit and profit after tax coming in at a variation. PNB said its PAT grew 307 per cent YoY, led by strong loan growth of 16.3 per cent YoY, 29 bps YoY expansion in net interest margin (NIM) and lower credit cost. Nirmal Bang said the 16 bps sequential compression in NIM to 3.08 per cent was on expected lines.

"We roll forward our valuation to June 2025E ABV of Rs94.3, valuing the bank at 0.75 times. We thus derive our target price of Rs 71 from Rs 55 earlier, valued at 0.7 times FY25E, which reflects an upside of 12 per cent. Considering the recent rally in the stock price of PNB and lower return ratios, we maintain an ‘Accumulate’ rating on the stock," Nirmal Bang said.

PNB said its standalone net profit surged 307 per cent to Rs 1,255.4 crore for the June quarter compared to Rs 308.4 crore in the same quarter last year. The net profit rose 8 per cent on sequential basis.

During the June quarter, PNB's asset quality improved, with gross non-performing assets ratio falling to 7.73 per cent from 8.74 per cent in the March quarter and 11.27 per cent in the June quarter of the last year.

For Motilal Oswal Securities, PNB's numbers we a mixed 1QFY24, with a 16 per cent miss on its profit estimates despite an in-line NII growth. High opex dented earnings while asset quality demonstrated a sharp improvement, it said.

"NII growth was flattish as margin contracted 17bp QoQ. Headline asset quality continued to improve, aided by lower slippages and healthy recoveries while PCR improved further to 75.8%. SMA overdue was steady at 0.2 per cent of domestic loans. We raise our PAT estimates for FY25E by 6 per cent and project an RoA/RoE of 0.6 per cent/9.4 per cent by FY25. We maintain 'Neutral' with a target of Rs 65," it said.

Antique Stock Broking said it still holds the view that PNB would also gain because of the credit cycle (in terms of credit cost), but a high-cost structure and weak core PPP-to -average assets are likely to keep return ratios sub-optimal.

"We expect a RoA of 0.5–0.6 per cent and RoE of over 11 per cent over FY24/ 25," it said while maintaining a 'Hold' with a target price of Rs 58.

Nuvama Institutional Equities said June quarter was healthy compared to the bank’s own historical trend, but PAT missed estimate due to higher opex and credit cost.

"While loan growth was strong, deposit growth was flat QoQ. With flat asset growth and NIM decline, NII remained flat QoQ. Core PPOP declined 8 per cent QoQ and 10 per cent YoY as opex remained sticky. GNPL fell sharply on lower slippage, which was the key positive highlight of Q1," Nuvama said,

Even with doubling of profit, RoA would remain below 0.5 per cent, which is lower than 1 per cent for peers, Nuvama said as it cut its EPS by 17 per cent for FY24 and 5 per cent for FY25 on sticky opex.

"We increase target to Rs 45, 0.7x BV (from Rs 35, 0.5x BV) on improving asset quality, but maintain ‘REDUCE’ as PNB’s profitability would remain weak even after improvement through FY25E," it said.

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