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Target: ₹45
CMP: ₹35.05
Our Investment Thesis is based on: Easing corporate stress with higher recovery; Risk adjusted growth; and An “in-expensive” valuation.
Bad loan recoveries and sale to NARCL may clean up the balance sheet with NPA normalization. Furthermore, steady credit growth along with lower credit cost are likely to boost the return ratios; which makes the stock rewarding at in-expensive valuation (0.35x standalone) with strong associates (PNB Housing, PNB Gilts).
Reported GNPA ratio is improving continuously since previous ten quarters with an exception of Q1-FY22 as NPA recognition resumed. Slippages during the previous quarter were curtailed at ₹5,000 crore about 3 per cent v/s run-rate of 8 per cent over last three quarters); this restricted GNPA/NNPA to 12.9 per cent/4.9 per cent (v/s 16.3 per cent/7.2 per cent 10 quarters ago).
The headline numbers clearly suggesting a steady improvement driven by higher recovery and write-offs. PNB plans to transfer bad loans of ₹2,000 crore to the NARCL (bad bank) in tranche 1 and ₹6,000 crore in tranche 2. These loans are 100 per cent provided and management believes it may be transferred at 25 per cent. NARCL will make payments using a combination of cash and security receipts (SRs). This may aid PNB’s equity capital position in the interim (CET1 currently at 10.7 per cent).
PNB has one of the lowest “Price to book” among the large public sector banks. It is currently trading at 0.3x of FY23E book value.
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