This State-Owned Mid Cap Banking Stock Gets Buy Call, Grew 52% In 3 Months, Target Price Rs 64

Stock Outlook & Returns

The PNB stock on NSE last traded at Rs 53.60 per share, gaining 5.41% as compared to its previous close. The stock on 25 November 2022 touched its new 52 week high at Rs 55.65, whereas its 52-week low was recorded on 20 June 2022 at Rs 28.05. It has a market cap of Rs 59,019.04 crore.

The stock in the past 1 week has surged by 16.9%, giving a positive return. Whereas in the past 1 and 3 months, it gave 23.79% and 52.06% positive returns, respectively. It gave 34.17% positive returns over a year. However, in the past 3 years, it has given 16.77%, and in the past 5 years, it gave 71.2% negative returns, respectively.

Tide turning positive; upgrade to Buy

PNB's balance sheet has improved - capital ratios are healthy with Tier-1 Capital at 12.2%. It has healthy CASA share (~44%), higher liquidity (liquidity coverage ratio of 160%). A higher LCR will boost margins further as lending picks up. Asset quality has improved sharply in the past quarters and lower slippages along with healthy recoveries going forward in near to medium term likely to improve asset quality further due to benig credit cycle. PPoP growth should improve as loan growth and margins improve. Overall, the earnings trajectory should also be strong led by benign credit cost as it has higher PCR. Strong PPoP growth along with low credit costs should drive a strong improvement in return ratios over the medium term.

Strong PPoP growth expected

The bank has reported healthy loan growth (of 15% y-o-y / 4% q-o-q) in Q2FY23 on the back of broad-based growth in retail & corporate book. Margins are expected to improve further as the loan book is yet to get the full benefit of the rising interest rate cycle. Moreover, higher LCR likely to boost margins further as lending picks up. PPoP growth is expected to improve driven by healthy loan growth and margin improvement. 

Lower credit costs to drive earnings growth

Overall PSU banks have emerged stronger after the COVID crisis and the corporate NPL cycle. These banks have improved capital ratios, increased coverage on bad loans, and have higher liquidity ratios. Moreover, trailing loan growth in riskier segments was muted due to the pandemic. Thus, NPA formation should moderate further. This implies that credit costs could remain below normalised levels. For PNB, NNPA is at 3.8% multi quarter low led by lower slippages in corporate book. Lower slippages trends are expected in the near to medium term because of improvement in corporate credit cycle. Provision coverage ratio stands at ~66%. Lower credit costs are likely to support earnings trajectory in the medium term. SMA 2 loans stand at ~0.27% of loans. Key monitorable would-be slippages from restructured book (1.8% of loans). 

Revision in estimates - We have increased our FY2023E/24E earnings estimates, factoring in higher margins & lower credit cost. We have added FY25E. 

Valuation

Sharekhan said, "We upgrade PNB to buy from hold rating with a revised TP of Rs.64. We expect RoAs (return on assets) of 0.7% for FY24E and 0.8% for FY25E, driving RoE (return on equity) of 10% and 12% for the respective years going ahead. We believe valuations are cheap for PNB compared to return ratio profile expected, as the bank is likely to deliver strong earnings growth and higher RoA/RoE led by healthy loan growth, margin improvement & lower credit costs (RoA from 0.3% in FY22 to 0.4%/0.7% /0.8% inFY23E/24E/25E)." 

Key Risks

Economic slowdown due to higher-than-anticipated credit cost especially from the corporate book and SME portfolio could affect earnings.

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.