- Punjab National Bank shifts focus to better-yielding loans and stronger returns over volume growth
- Loan growth expected at 13% CAGR through FY26-29 with ROA reaching 0.9% in FY27
- Bank reduces low-yield corporate loans and bulk deposits to improve margins and profitability
State-owned lender Punjab National Bank's next leg of growth may not be about chasing the biggest loan numbers. Instead, the focus is shifting towards better-yielding loans, lower funding costs and stronger returns, with foreign brokerage Jefferies retaining its ‘Buy' rating after a recent meeting with managing director (MD) and chief executive officer (CEO) Ashok Chandra.
Jefferies analysts Prakhar Sharma and Vinayak Agarwal said PNB's strategy of prioritising the quality of loan growth could support margin expansion over the next few quarters, even if headline loan growth remains somewhat below that of peers.
Jefferies sees scope for NIMs to improve from first-quarter levels and expects the bank to deliver 13% loan CAGR through FY26-29, with ROA reaching 0.9% in FY27.
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Why Jefferies Remains Upbeat
Jefferies said management is deliberately moving away from low-yielding corporate loans and IBPC, while reducing reliance on bulk deposits and certificates of deposit.
Net loan growth stood at 14% year-on-year, but IBPC exposure has fallen 34% YoY to Rs 28,800 crore, or around 2% of loans. Bulk deposits/CDs have also declined by around 28% YoY.
The transition could keep reported loan growth at around 12-13% over the next two to three quarters, but Jefferies believes the resulting improvement in loan mix and funding costs should be more important for profitability. Management expects credit growth to accelerate towards 14-15% in FY28.
PNB also has room to grow, with domestic loan-to-deposit ratio at 72% and liquidity coverage ratio at 141%. Management remains confident of sustaining 1% ROA in FY27 and improving it thereafter.
Retail, SME Push To Support Growth
The bank is simultaneously investing in its retail and SME franchise, while expanding fee-generating businesses such as credit cards, wealth management, cash management and supply-chain and trade finance.
Jefferies noted that PNB sources around 85% of its loans internally, with only 15% coming through direct selling agents. In retail, the bank is focusing on customers with Cibil scores above 750 and stepping up branch-level engagement.
ECL, Wage Costs Remain Risks
The transition to expected credit loss (ECL) provisioning could result in a one-time Rs 9,500-10,000 crore impact on net worth, equivalent to around 6% of net worth. Jefferies expects the impact to be amortised over five years from FY28-30, while incremental provisioning could add 10-15 basis points to loans and weigh on earnings.
Upcoming wage negotiations are another monitorable for PSU banks. PNB has also mobilised $1 billion through FCNR-B deposits and is targeting $2.5-3 billion, which could be marginally margin dilutive but cheaper than wholesale funding.
Buy Call Remains
Jefferies retained its Buy rating and Rs 130 target price, implying around 15% upside from Rs 113.50. The brokerage values PNB at 0.9x FY27 adjusted book value and 7x earnings, which it considers attractive.
It expects PNB to deliver 0.2-0.4% credit costs and 0.9% ROA in FY27, with the ability to absorb higher credit and staff costs emerging as a potential trigger for earnings upgrades.
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