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

Asset high quality challenges will persist and credit score price ought to stay elevated in close to to medium time period.

Punjab National Bank’s (PNB’s) Q4FY21 PAT of Rs 5.9 bn was supported by larger different revenue, at the same time as working momentum remained weak. Asset high quality mirrored persistent challenges. Slippages remained excessive at >14% (annualised) and SMA-2 >4.4%. Whereas restructured loans had been decrease than anticipated, nonetheless evolving stress and low provision inventory forebode excessive credit score prices going ahead.

The financial institution’s current capital increase was dilutive (persistent problem for PSBs). Moreover, uncertainty lingers owing to: (i) the merger impact enjoying out—we count on the transition to be arduous; and (ii) second wave impression on asset high quality. Preserve Beneath Assessment awaiting stabilisation in earnings and incremental readability on dangerous loans.

Asset high quality continues to disappoint
GNPLs/NNPLs declined to 14.1%/5.7% versus 14.7%/5.65% professional forma in Q3FY21. The important thing disappointment flowed from excessive slippages– Rs 240 bn, >14% (annualised)– the very best amongst peer set in Q4FY21. Whereas restructuring seemed fairly managed, we aren’t snug sufficient to type a decisive view on fairness sanctity. There’s loads to maintain us on guard: (i) Potential careworn SMA-2 pool, nonetheless at 4.4%, stays excessive regardless of substantial slippages; (ii) expectations of additional restructuring and consequent provisions thereof; (iii) insufficient provisions to soak up potential losses. Asset high quality challenges will persist and credit score price ought to stay elevated in close to to medium time period.

Core earnings momentum nonetheless tender
Enterprise momentum continues to be tender – gross mortgage ebook fell 3% and deposit grew at 3% y-o-y– considerably decrease than friends. This, together with strain on NIMs (down >30bps q-o-q), affected core working profitability, regardless that working price was beneath management. With restricted levers on NIM enchancment and within the absence of development, working profitability will stay subdued. We imagine operational points confronted by PNB will proceed to pose a problem.

Outlook: Uncertainty persists
A weak earnings profile, operational points and diluted franchise render PNB a structurally challenged funding proposition. Moreover, the merger brings its personal uncertainties and stays a key monitorable. Pending readability on crucial points, we preserve the inventory Beneath Assessment.