In a financial year marked by credit tailwinds and operational resilience, Punjab National Bank (PNB) has demonstrated commendable earnings momentum despite headwinds on the margin front. Emkay Global has reiterated a BUY recommendation on the stock, maintaining its 12-month target price of Rs 125, implying an upside of 33% from current levels. While the bank reported stable profitability aided by treasury gains and recoveries, moderation in net interest margin (NIM) and a rise in slippages remained areas of concern. However, the outlook remains constructive as PNB aims to manage its margin profile, bolster asset quality, and enhance return ratios in the coming fiscal years.

Strong Credit Momentum, but Margin Contraction Persists

PNB clocked 15% year-on-year (YoY) net credit growth, outperforming the systemic average, driven by traction in retail, agriculture, and MSME (RAM) segments. Total deposits expanded by 14% YoY, keeping the loan-to-deposit ratio (LDR) modest at 69%.

However, the sharp increase in the cost of deposits (CoD) due to a special 400-day deposit scheme resulted in a 12 basis point sequential decline in NIM to 2.8%. The management noted that CoD has likely peaked and expects relief starting Q3FY26, driven by repricing and withdrawal of high-cost schemes. Guidance for FY26 NIM ranges between 2.8–2.9% in H1, with further expansion in the latter half.

Asset Quality Improves on Higher Write-offs

Fresh slippages during the quarter increased to Rs 30 billion, primarily from MSME and agricultural loans. However, aggressive write-offs helped bring gross non-performing assets (GNPA) down to 3.95% from 4.09% in the previous quarter. Net NPA (NNPA) remained stable at 0.4%, and the provision coverage ratio (PCR) stayed strong at 90.3%.

The bank targets quarterly slippages of Rs 15–17 billion going forward, with an annual recovery expectation of Rs 160 billion, primarily from smaller accounts. The total written-off book stands at Rs 920 billion.

Earnings Snapshot and Valuation Drivers

PNB reported a net profit of Rs 45.7 billion in Q4FY25, largely in line with consensus expectations. The bottom line was supported by treasury income and higher recoveries, while operating profit was impacted by elevated expenses.

HTML Table: Quarterly Financial Highlights

Guidance: Growth Moderation and Focus on Profitability

The bank projects 11–12% credit growth in FY26, with 15–16% growth in retail and SME loans. Deposit growth is expected at 9–10%. PNB also indicated that MCLR has already been lowered by 10bps, and further repricing of RLLR-based loans is under review.

Furthermore, the bank is exploring migration to the new tax regime by Q2FY26, which could enhance net profitability. Treasury gains and low credit costs are expected to offset the margin pressure, enabling RoA to remain in the 0.9–1.0% range over FY26–28E.

Valuation Remains Attractive Despite Short-Term Margin Risks

Emkay maintains its valuation for PNB at 0.9x FY27E standalone book value plus subsidiary value of Rs 11 per share. The bank trades at 0.6x FY28E P/ABV, reflecting a significant discount to peers, thereby offering re-rating potential.

HTML Table: Key Valuation Metrics

Key Risks and Investor Watchpoints

While the base case remains optimistic, investors should monitor:

Further slippage upticks, especially from MSME and agri books.

Delay in CoD easing, which may prolong NIM suppression.

Macroeconomic shocks or global volatility that may impair asset quality.

Bottomline: Positioned for Steady Gains, With Margin Recalibration Underway

Punjab National Bank’s ability to maintain robust credit expansion, strengthen its balance sheet, and navigate asset quality challenges reflects strategic maturity. While near-term margins may face constraints, the roadmap to recovery is visible through improved recoveries, tax regime transition, and operational efficiency. Emkay’s continued BUY stance with a Rs 125 price target signals confidence in PNB’s capacity to sustain value creation, even as the bank realigns its yield dynamics for the next growth phase.