Sharekhan Research has reiterated a BUY recommendation for Punjab National Bank (PNB) with a revised price target of Rs 125, reflecting a potential upside from the current market price of Rs 101. The report underscores PNB's robust performance driven by a sharp improvement in asset quality, strong bad loan recoveries, and continued profitability momentum. Despite weaknesses in core pre-provision operating profit (PPoP) and net interest income (NII), the bank's strong recoveries and improved return on assets (RoA) highlight its resilience.

Sharekhan Maintains BUY on PNB

Recommendation Overview
Sharekhan maintains a BUY rating for Punjab National Bank with an optimistic outlook on sustained profitability and asset quality improvements. The target price of Rs 125 is based on favorable risk-reward dynamics and expected continuation of strong recovery trends.

Q2FY25 Performance Highlights

Key Financial Metrics

Net profit surged by 145% YoY to Rs 4,303 crore, driven by a sharp reduction in provisions.
NII grew 6% YoY to Rs 10,517 crore, but remained flat on a sequential basis due to declining yields.
NIMs contracted by 15 bps QoQ to 2.92%, impacted by rising funding costs.
Asset Quality Improvement

Gross NPA (GNPA) and Net NPA (NNPA) ratios declined significantly to 4.48% (-50 bps QoQ) and 0.46% (-14 bps QoQ), respectively.
Net slippages turned negative at Rs 734 crore, signaling strong recoveries and reduced fresh slippages.
Operational Trends

Treasury gains rose to Rs 1,581 crore, offsetting muted NII and fee income.
Core PPoP declined 11% YoY and QoQ due to higher employee benefit provisions under IND AS-15.

Asset Quality: A Decadal Low

Bad Loan Recoveries

Recoveries led to a decline in the GNPA pool, positioning PNB among the best-performing public sector banks.
The bank maintained its recovery target of Rs 18,000 crore for FY25, ensuring continued reduction in NPAs.
Restructured Advances

The restructured book constituted only 0.8% of net advances, indicating minimal stress from pandemic-related loans.
Provision Coverage Ratio (PCR)

PCR improved to 90%, reflecting strong provisioning and buffer against contingencies.

Growth in Advances and Deposits

Loan Growth

Net advances increased by 15% YoY and 4% QoQ to Rs 10,19,595 crore, supported by growth in RAM (Retail, Agriculture, MSME) and corporate loans.
Overseas advances grew 38% YoY, albeit contributing only 4-5% to the total loan book.
Deposit Trends

Total deposits rose 11% YoY to Rs 14,58,342 crore, with term deposits leading the growth at 17% YoY.
Domestic CASA ratio stood at 38.2%, reflecting a marginal decline QoQ.

Management Guidance

Profitability and Loan Growth

Management expects credit costs to remain low at 25–30 bps of advances in FY25E, supporting an RoA trajectory of ~1%.
Loan growth guidance remains conservative at 11–12% for FY25, with a focus on expanding RAM advances.
Margins and Cost Efficiency

NIMs are expected to stabilize at 2.9–3.0% in FY25, supported by loan repricing and lower funding costs post rate cuts.
PNB is aiming for a cost-to-income ratio improvement through tighter control on operating expenses.

Valuation and Outlook

Valuation Metrics

The stock trades at 0.9x FY25E BV and 0.8x FY26E BV, offering an attractive entry point.
Price-to-earnings (P/E) multiples stand at 7.2x FY25E EPS, reflecting favorable risk-reward dynamics.
Sector Positioning

With a decadal-low NNPA ratio and strong recoveries, PNB is well-positioned among large PSU banks.
Continued improvement in asset quality and stable margins make it a compelling investment in the banking sector.