JP Morgan upgrades PNB to 'overweight'; stock jumps

Shares of state-run lender Punjab National Bank rose as much as 3% on Monday after foreign brokerage JP Morgan upgraded the bank's rating to 'overweight' from 'underweight'.

JP Morgan also raised its target price for PNB to ₹72 from ₹34 earlier, implying a potential upside of 28% from the current levels.

Reacting to the foreign brokerage's rating upgrade, the public sector lender's stock jumped nearly 3% to ₹57.95 on the National Stock Exchange (NSE).

Punjab National Bank's net slippages in Q2 have "gotten into negative territory and recovery momentum is outpacing new non-performing loan creation, plus there is minimal stress in corporate loans", the brokerage said.

It, however, estimates the lender's earnings to remain under pressure in FY23/24 as the company catches up on back-book provisioning. "This keeps our F24 estimate broadly unchanged. However, with limited new stress formation and system growth itself picking up, we see further scope of re-rating at PNB," JP Morgan said.

While PNB's operating profit metrics are comparable to those of other PSU banks, return on assets is materially lower due to higher provision, the brokerage said, adding this gap could start to narrow as provisions start reducing.

The bank, however, continues to lose market share in both credit and deposits, unlike the State Bank of India and Bank of Baroda Ltd., and hence a discount to them will be fair, said JP Morgan.

This comes days after the government approved to divest the public sector lender's entire stake in UTI Asset Management Company. The government-run lender is looking to pare its non-core assets to boost its capital base.

The PSU bank owns a 15.22% stake in UTI AMC and will sell its entire stake in the mutual fund company in single or multiple tranches for realisation of gain on investment. UTI AMC's valuation is pegged at around ₹1,329 crore.

Established in November 2002, UTI AMC is the investment manager to the schemes of UTI Mutual Fund. It also manages offshore funds and provides support to the specified undertaking of the Unit Trust of India. UTI AMC has been promoted by four sponsors, namely, State Bank of India, Life Insurance Corporation of India, Bank of Baroda and Punjab National Bank and presently, they collectively hold 45.16% of the shares of UTI AMC. In the last three years, UTI AMC posted a turnover of ₹1,060.27, ₹942.33, and ₹861.79 in FY22, FY21, and FY20, respectively.

CARE Ratings, too, has revised the outlook for the bank's additional tier-I bonds, tier II bonds, and infrastructure bonds from 'Stable' to 'Positive'. The reaffirmation of the ratings assigned to the debt instruments of PNB factored in the majority ownership and the demonstrated and expected continued support from the Government of India (GoI), which holds 73.15% shares in the bank.