Punjab National Bank (PNB), one of India’s leading public sector banks, has been upgraded to a "Buy" by Geojit Financial Services with a target price of Rs. 111. This upgrade reflects the bank's strong quarterly performance, improved asset quality, and consistent loan growth. Investors are encouraged to capitalize on PNB's robust growth trajectory, which is supported by strategic initiatives to enhance profitability.

Summary

PNB delivered a stellar performance in Q2FY25, marked by a 145.1% YoY increase in net profit, driven by strong interest income and reduced provisions. The bank's gross non-performing assets (GNPA) ratio improved significantly to 4.5% from 7% a year ago, demonstrating better asset quality. With increasing retail and MSME loan shares, as well as a focus on reducing costs, PNB is well-positioned for sustained profitability. Geojit Financial Services has revised its target price to Rs. 111, reflecting a 10% upside from the current market price of Rs. 101.

Strong Growth in Interest Income

Key Highlights:

Interest income rose by 13.4% YoY to Rs. 29,875 crore, driven by robust growth in advances and investments.
Net Interest Income (NII) increased by 6.0% YoY to Rs. 10,517 crore, supported by a 14.7% rise in interest on advances.
Despite the growth in NII, net interest margin (NIM) contracted by 19 basis points (bps) YoY to 2.9% due to higher deposit costs.

Profit Surge Backed by Reduced Provisions

Provisions: PNB reported a significant decline of 91.6% in provisions YoY, which played a pivotal role in boosting profitability.

Net Profit: Profit after tax (PAT) surged 145.1% YoY to Rs. 4,303 crore, supported by a 51% increase in other income.

This sharp rise in profitability underscores the bank’s efficient management of credit costs and enhanced recovery efforts.

Asset Quality: Marked Improvement

PNB’s asset quality demonstrated significant progress:

GNPA Ratio: Declined to 4.5% in Q2FY25 from 7.0% in Q2FY24.
Net NPA Ratio: Reduced to 0.5% from 1.5% YoY.
Provision Coverage Ratio (PCR): Strengthened to 90.2%, reflecting the bank’s proactive risk management.
The bank has also revised its FY25 GNPA guidance downward to below 4%, further highlighting its commitment to maintaining a high-quality loan book.

Loan and Deposit Growth Fuel Expansion

Advances: PNB’s advances grew 3.2% quarter-on-quarter (QoQ) to Rs. 10,61,904 crore, driven by:

Retail loans (+6.6% QoQ).
MSME loans (+5.7% QoQ).
Deposits: Deposits increased by 3.6% QoQ to Rs. 14,58,342 crore, with term deposits growing by 4.9% QoQ. However, the current account savings account (CASA) ratio declined marginally to 39.3%.

Strategic Focus on RAM Portfolio

PNB continues to prioritize its retail, agriculture, and MSME (RAM) segments:

The RAM portfolio now contributes a larger share to the overall advances, enhancing the bank's risk-adjusted returns.
This strategic shift is expected to sustain margins and support long-term growth.

Cost Efficiency Remains a Priority

Cost-to-Income Ratio: Increased to 54.6% in Q2FY25 due to elevated deposit costs and wage-related provisions. However, the bank is working to streamline its operations and expects this ratio to decline in subsequent quarters.

Guidance and Valuation

PNB has outlined the following key metrics for FY25:

NIM Guidance: 2.9%–3.0%.
Credit Cost Guidance: Reduced to below 0.5% from 1%.
GNPA Target: Below 4%.
Geojit has valued PNB at 0.9x FY26E BVPS, translating to a target price of Rs. 111. This reflects the bank’s improved financial metrics and growth potential.

Investment Rationale

Why Buy PNB?

Improved Asset Quality: Significant reduction in GNPA and NNPA ratios.
Robust Profit Growth: Driven by reduced provisions and strong income streams.
Loan Book Diversification: Focus on high-growth RAM segments.
Attractive Valuation: P/E ratio of 7.3x FY25E EPS makes it an appealing investment opportunity.

Risks to Consider

Macroeconomic Challenges: Adverse economic conditions could impact credit growth and asset quality.

Margin Pressures: Rising deposit costs may further compress NIMs.

Regulatory Risks: Changes in banking regulations could affect profitability.