Core profitability a bother for PNB

Here, core PPOP is derived by subtracting operating expenses from total core income, comprising net interest income and fee-based income. Now, since fee income as a percentage of core income is only 12%, it leaves scope for improvement, but the road to repair a weak core performance may be stretched.

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Note that the Q3 profit surge was primarily driven by two factors. One, profit from treasury operations (a volatile and risky income, therefore not considered as core income) of ₹1,007 crore, compared to a treasury loss of ₹699 crore in the corresponding period a year ago. Two, an almost 90% year-on-year decline in NPA (non-performing asset) provisions to ₹318 crore, as recoveries outpaced slippages.

PNB’s domestic advance growth of 14% year-on-year was in line with its deposit growth. However, despite the robust growth in loan book, net interest income (NII) grew at a slower rate of 7% year-on-year, as domestic net interest margin (NIM) declined from 3.3% to 3.09% year-on-year. While NIM showed slight improvement from the Q2 level of 3.06%, it was bolstered by a ₹350 crore interest income from an income tax refund.

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Operating expenses also saw a significant rise, particularly due to a 26% increase in employee costs. A part of the increase can be explained by higher employee benefit provisions as per Accounting Standard 15. The bank had to provide ₹1,400 crore towards employee benefits in Q3, a trend expected to continue into Q4.

PNB is a targeting credit growth in the range of 13-14% in Q4 to be led by healthy increase in retail, agricultural and MSME (RAM) portfolio. RAM portfolio is proposed to be increased to 60% of the loan book from the current level of 56% at the end of Q3. The bank has investments in excess of SLR at ₹1 trillion that can be liquidated, if necessary, to fund the loan book, which helps in avoiding the need for raising expensive term deposits aggressively.

The provisioning requirements for NPAs are not expected to rise significantly, with the provision coverage ratio (PCR) standing at an impressive 97% at the end of Q3, including written-off loans.

Both gross NPA (GNPA) and net NPA (NNPA) have improved, with incremental slippages declining. GNPA and NNPA fell to 4.09% and 0.41%, respectively, down from 4.48% and 0.46% a quarter earlier. The bank expects GNPA/NNPA ratios to stay below 4% and 0.5%, respectively, by FY25, and aims for a return on assets (RoA) of 1% by the end of the fiscal year.

Meanwhile, in this financial year so far, the PNB stock is down 21%, meaningfully underperforming the Nifty Bank index. This is partly due to weak investor sentiment towards public sector banks.

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PNB’s price-to book value valuation, based on Bloomberg consensus estimates, is reasonable at 0.8x for FY26 even for sub 1% RoA. The relatively low valuation of PNB and other public sector banks compared to private sector banks is driven by low core income and high operating expenses, which culminate in low returns on assets. Unless there is a consistent and substantial improvement in core income, the valuation gap between private and public sector banks is unlikely to be bridged.