Punjab National Bank share price: Ventura Securities initiates coverage with a BUY for a price target of Rs 54

Punjab National Bank, post its merger with the two banks – United Bank of India and Oriental Bank of Commerce in 2020 - is today positioned as India’s 2nd largest PSU bank and overall, 3rd largest in terms of total credit. The bank is in the midst of raising its 2nd tranche of funds (Rs 2000 – 3000 cr) to beef up its capital base. Recently, it completed an integration program to onboard the merged entities onto a single platform. As a part of its further rationalization, 1000 branches (which are in close proximity or unviable) are expected to be shut down by the year 2022. Punjab National Bank share price today is Rs 41.8, trading flat.

This major restructuring along with the recently concluded aggressive write-down of NPLs and stressed assets has put the bank into a new phase of growth. While the loan book is expected to grow by 2.5% YoY in FY21 to Rs.7.5 lac cr, we expect that the advances will grow at a CAGR of 7.7% to Rs.8.7 lac cr by FY23. This growth is expected to be fuelled by the faster growth of its RAMs (retail, agri and MSME) portfolio, whose contribution is expected to improve by 1060bps to 60% by FY23 (over FY20).

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To ensure better credit quality, the bank has restructured its lending business such that specialized branches (with skilled staff) would focus on specific lending portfolios. This will ensure that credit appraisal and underwriting is best in class.

Deposit growth is expected to be commensurate with the lending trajectory and Ventura Securities forecast a CAGR growth of 7.8% to Rs.13.4 lac cr by FY23. CASA deposits at 44% continue to remain healthy and we expect CASA deposits to grow at a CAGR of 8.3% to Rs.5.9 lac cr over the same period (CASA ratio +50bps to 44%).

Taking advantage of the flush liquidity during the pandemic the bank has shed its high-cost deposits and lowered its cost of funds by 85bps to 3.61%. At the same time the shift in focus to more granular lending to the high yielding retail and MSME space should ensure better yields. With this, we expect NIMs to expand by 21bps to 3.2% by FY23.

At the Current market price of Rs 41.8 the stock is valued at 0.7X its FY23 Adj. BV of Rs.60 (not taking into consideration the 2nd tranche of QIP). Given the resumption of the growth trajectory and its wide scale of operations, we expect a moderate rerating in the valuations. Ventura Securities initiates coverage with a BUY for a price target of Rs.54 (0.9X FY23 Adj. P/BV), representing an upside of 29% from the CMP. There exist significant tailwinds, which if come to fruition, could represent sizable upside risk to Ventura Securities estimates.