Punjab National Bank rating – ‘Under Review’: Asset quality continued to disappoint in Q4

Punjab National Bank’s (PNB’s) Q4FY21 PAT of Rs 5.9 bn was supported by higher other income, even as operating momentum remained weak. Asset quality reflected persistent challenges. Slippages remained high at >14% (annualised) and SMA-2 >4.4%. While restructured loans were lower than anticipated, still evolving stress and low provision stock forebode high credit costs going forward.

The bank’s recent capital raise was dilutive (persistent challenge for PSBs). Additionally, uncertainty lingers owing to: (i) the merger effect playing out—we expect the transition to be arduous; and (ii) second wave impact on asset quality. Maintain Under Review awaiting stabilisation in earnings and incremental clarity on bad loans.

Asset quality continues to disappoint
GNPLs/NNPLs declined to 14.1%/5.7% versus 14.7%/5.65% pro forma in Q3FY21. The key disappointment flowed from high slippages– Rs 240 bn, >14% (annualised)– the highest among peer set in Q4FY21. While restructuring looked reasonably controlled, we are not comfortable enough to form a decisive view on equity sanctity. There is plenty to keep us on guard: (i) Potential stressed SMA-2 pool, still at 4.4%, remains high despite substantial slippages; (ii) expectations of further restructuring and consequent provisions thereof; (iii) inadequate provisions to absorb potential losses. Asset quality challenges will persist and credit cost should remain elevated in near to medium term.

Core earnings momentum still soft
Business momentum continues to be soft – gross loan book fell 3% and deposit grew at 3% y-o-y– significantly lower than peers. This, along with pressure on NIMs (down >30bps q-o-q), affected core operating profitability, even though operating cost was under control. With limited levers on NIM improvement and in the absence of growth, operating profitability will remain subdued. We believe operational issues faced by PNB will continue to pose a challenge.

Outlook: Uncertainty persists
A weak earnings profile, operational issues and diluted franchise render PNB a structurally challenged investment proposition. Furthermore, the merger brings its own uncertainties and remains a key monitorable. Pending clarity on critical issues, we maintain the stock Under Review.