Tactical Focus On RAM Portfolio And Asset Quality Fuels Earnings Growth For The Bank's Future

Key Takeaways

• Focus on improving asset quality and RAM portfolio growth aims to enhance profitability and increase revenue through higher-yield segments.
  
• Strengthened earnings capacity and successful capital management could support balance sheet with potential for enhanced future earnings.
  
• Rising costs, reliance on government bonds, vulnerable interest income, and unsustainable treasury profits pose risks to Punjab National Bank's future earnings potential.

Catalysts

Provides various banking and financial products and services in India.

• The bank aims to further enhance its asset quality by reducing gross NPA to 3.5%–3.75% by March 2025, which could improve net margins through lower provisioning requirements.
  
• With a focus on growing the RAM (Retail, Agriculture, MSME) portfolio to 60% of total advances in the next 2–3 years, there is potential for higher revenue from these diversified and possibly higher-yielding segments.
  
• The significant increase in net profit, reported as the best in the last 14 quarters, along with substantial recoveries from written-off accounts, suggests strengthened earnings capacity going forward.
  
• Successful capital adequacy management with a CET1 ratio improvement and plans for further capital raises if favorable market conditions continue to support balance sheet strength, potentially enhancing earnings.
  
• The bank's strategic focus on a high PCR (Provision Coverage Ratio) of 97% and ongoing strong recovery efforts could lead to reduced credit costs, enhancing profitability.

Punjab National Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Punjab National Bank's revenue will grow by 20.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 28.3% today to 25.7% in 3 years time.
• Analysts expect earnings to reach ₹188.4 billion (and earnings per share of ₹15.4) by about November 2027, up from ₹117.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹138.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.6x on those 2027 earnings, up from 10.3x today. This future PE is lower than the current PE for the IN Banks industry at 12.7x.
• Analysts expect the number of shares outstanding to grow by 2.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.08%, as per the Simply Wall St company report.

Punjab National Bank Future Earnings Per Share Growth

Risks

• The cost-to-income ratio has risen, driven by a significant increase in employee-related provisions, possibly affecting operating expenses and net margins going forward.
  
• The reliance on government bonds for capital adequacy through recapitalization bonds could limit future earnings potential and affect revenue stability if there are changes in government policy or interest rates.
  
• A significant part of the net interest income could be vulnerable due to pressure on margins, as increasing cost of deposits and a narrow credit-deposit ratio may constrain the bank’s ability to maintain current spreads, potentially affecting future earnings.
  
• The bank's overseas loan growth, primarily in short-term, low-margin buyers' credit, may drag down overall margins, impacting net interest income or earnings.
  
• A substantial portion of profit is driven by treasury operations and recoveries from written-off accounts, which may not be sustainable long-term income sources, thereby posing a risk to revenue consistency if these recoveries do not remain at high levels.

Valuation

• The analysts have a consensus price target of ₹109.88 for Punjab National Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹140.0, and the most bearish reporting a price target of just ₹65.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹732.9 billion, earnings will come to ₹188.4 billion, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 14.1%.
  
• Given the current share price of ₹105.14, the analyst's price target of ₹109.88 is 4.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.