Fundamental Radar: After 50% rally in 3 months, Rahul Malani lists 5 factors why PNB is a top buy for 2023

Long-term investors can still look at buying the stock now or on dips for a possible target above Rs 60 in the next 12 months, they say.

Attractive valuations, strong earnings growth, as well as normalisation of credit costs make

an attractive buy, experts suggest.

“We remain positive on PNB as the bank is likely to deliver strong earnings driven by healthy operating profit growth and normalisation of credit costs,” Rahul Malani, Analyst Banking and NBFC, Fundamental Research at Sharekhan by

, said.

“We expect RoAs 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,” he added.

Rahul Malani, Analyst Banking and NBFC, Fundamental Research at Sharekhan by BNP Paribas, highlights 5 factors which makes PNB an attractive buy:

Strong Recoveries:

Strong recoveries which have started to outpace slippages and lower fresh slippage formation going ahead would help to normalize credit costs.

Overall, the SMA-2 book stands at ~0.3% of loans. Improvement in the corporate credit cycle along with the fact that trailing loan growth in the corporate segment has been muted in the past few years should moderate NPL formation further.

Coverage on Loans:

The bank’s coverage on total impaired loans stands at 52%. Bank is expected to further increase the coverage on impaired loans in H2FY23.

Provisions are largely related to the back book (net NPL 3.8% & restructured book 1.8%). Thus, the market may look through one-time book value adjustments.

Strong Balance Sheet:

Bank balance sheet has strengthened – capital ratios are healthy, with Tier-1 capital at 12.2%. It has healthy CASA share (~44%), and higher liquidity (liquidity coverage ratio of 160%).

System loan growth is strong at 16-17% while the bank eyes credit growth of 12-14% for FY23E. However, the bank is likely to deliver higher growth in FY24E as balance sheet strength improves further going ahead.

The bank’s excess liquidity profile (CD ratio 70%, LCR 160%) in an environment of deposit growth challenges places it well to accelerate loan growth.

Operating Profit growth:

Operating profit growth should improve as loan growth accelerate, and with a stable margin outlook. Strong PPoP growth along with normalization of credit costs should drive a strong improvement in return ratios in FY24E & FY25E.

Valuation:
Sharekhan maintains a buy recommendation on PNB with a target 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,” said Malani.

“We believe valuations are cheap for PNB as compared to an improvement in return ratio profile expected going ahead, as the bank is likely to deliver strong earnings growth and higher RoA/RoE led by healthy loan growth and lower credit costs (RoA from 0.3% in FY22 to 0.4%/0.7% /0.8% inFY23E/24E/25E),” he said.

The stock currently trades at 0.7x/0.6x/0.6x its FY2023E/24E/25E ABV.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)