PNB gains 6% on healthy Q2 results. Should you buy, hold or sell the stock?

As slippages declined during the September quarter, brokerages largely shared a bullish stance on PNB as the asset quality continues to improve

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Punjab National Bank (PNB) rallied 6 percent on October 27 morning after the state-owned lender delivered a strong set of numbers for the July-September quarter.

As slippages declined, brokerages largely shared a bullish stance on the counter as asset quality continued to improve.

Declining slippages a major positive

Global brokerage firm CLSA shared an “outperform” rating on the stock and raised the target price to Rs 80 a share.

“The company delivered 0.4 percent return-on-asset (RoA) in the first half of FY24 and we expect them to maintain this in H2FY24 as well. We upgrade pre-provision operating profit estimate by 4-9 percent for FY24/25,” analysts wrote in a post-result review note.

The lender’s gross non-performing assets (GNPAs) improved by a whopping 352 basis points (bps) on-year to 6.9 percent, whereas net NPA declined by 232 bps on-year to 1.4 percent.

One basis point is one-hundredth of a percentage point.

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Analysts at Kotak Institutional Equities said the non-performing loan (NPL) ratio gap with peers has narrowed steadily over the past few quarters.

“As fresh slippages and outstanding net NPLs both decline steadily, the requirement for provisions is likely to decline steadily,” it said.

Provision refers to the amount a bank needs to set aside to cover the losses from a loan account. When an account turns into an NPA, the provisions required will equal the full loan amount.

The brokerage expects cost ratios to improve as retirement-related provisions decline.” We are getting closer to a point where PNB is likely to see sharp improvement in return ratios,” Kotak analysts said, sharing a “buy” rating on the counter, with a target price of Rs 82.

Overall, PNB’s net profit rose 327 percent on-year to Rs 1,726 crore in Q2FY24 driven by 20 percent on-year net interest income (NII).

ALSO READ: JP Morgan upgrades India to ‘overweight’, includes 3 stocks in EM portfolio

Margins likely to moderate 

Global net interest margins (NIMs) expanded 11 bps on-year to 3.1 percent.

Jefferies, however, maintained a “hold” rating with a target price of Rs 77 a share. Its analysts said margins would moderate from here on as 15 percent of term deposits amounting to Rs 1 lakh crore were yet to be priced in.

The management guided NIMs to be in the range of 2.9-3 percent by the end of FY24. “On account of the deposit re-pricing, NIMs will be impacted as the whole of deposit has not been re-priced yet,” they said.

Strong deposit accretion seen

That apart, domestic deposits grew 10 percent on-year to Rs 12 lakh crore and domestic advances climbed 13 percent to Rs 9 lakh crore in Q2FY24.

The management guided for credit growth of 12-13 percent for FY24, with deposit growth of 10-11 percent.

Analysts at Motilal Oswal reiterated a “neutral” stance on the counter, with a target price of Rs 75 a share.

“We maintain our estimates and project an RoA/RoE of 0.6 percent/9 percent by FY25,” the brokerage firm noted.

At 11.42 am, the stock was trading at Rs 73.40, up   5.08 percent from the previous close.

In the past three months, the stock has gained 17 percent against a 4 percent decline in the Sensex. The scrip hit a 52-week high of Rs 83 on October 3.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.