PNB Q3 shows asset quality gains despite margin pressure: Analysts

Punjab National Bank’s December-quarter (Q3FY26) performance underscored a familiar theme for state-run lenders i.e.steady balance sheet repair and credit growth, offset by pressure on margins. 

 

Brokerages broadly agree that while core profitability remains muted, one-off gains and prudent provisioning have strengthened the bank’s medium-term outlook, keeping the investment case intact.

 

PNB reported a net profit of about ₹5,100 crore for the quarter, up in low double digits year-on-year (Y-o-Y), supported largely by a sharp rise in non-interest income. A key contributor was a one-time gain of ₹910 crore from the sale of its stake in Canara HSBC Life Insurance, along with higher recoveries from written-off accounts. Emkay Global noted that these gains were not allowed to flow entirely to the bottom line, as the bank chose to shore up its buffers ahead of the transition to the expected credit loss (ECL) framework.

 

Net interest margins (NIMs), however, disappointed across estimates. Emkay and Motilal Oswal both flagged an 8 basis point (bps) sequential decline in margins to around 2.5-2.52 per cent, driven by lower loan and investment yields and faster repricing on the asset side. Consequently, net interest income (NII) remained subdued, missing some brokerage expectations despite healthy loan growth of about 12 per cent Y-o-Y.

 

On the balance sheet front, credit expansion continued at a steady pace, with the loan book rising nearly 12 per cent Y-o-Y and deposits growing in high single digits. The credit-deposit ratio climbed to 72 per cent, a multi-quarter high, reflecting stronger loan traction. Motilal Oswal highlighted that total revenues still managed to grow at a mid-single-digit pace due to the surge in other income, cushioning the impact of weaker margins.  ALSO READ | Tata Capital shares hit record as analysts hike target after Q3 results 

Asset quality remained a clear positive, analysts said. Gross non-performing assets declined by 26 basis points sequentially to about 3.2 per cent, while net NPAs stayed near historic lows at around 0.32 per cent. Slippages were contained, and recovery performance stayed healthy. According to Motilal Oswal, the provision coverage ratio stood at a robust 90 per cent, underscoring balance sheet resilience.

 

Management used the quarter’s treasury and stake-sale gains to create sizable floating provisions of roughly ₹950 crore-960 crore, taking the total floating buffer to nearly ₹1,800 crore. JM Financial pointed out that this pushed reported credit costs to around 40 bps for the quarter, above the sub-25 basis point run-rate seen over the previous few quarters, but viewed the move as conservative rather than concerning.

 

Going forward, brokerages expect near-term return ratios to remain modest, partly due to margin pressures and a one-off deferred tax impact as PNB migrates to the new tax regime. Emkay expects return on assets to moderate to around 0.9 per cent in FY26, before improving towards 1 per cent over FY27-28 as growth picks up, provisions normalise and tax rates fall. JM Financial, while more cautious, builds in average RoA of about 0.8 per cent over FY27-28, reflecting a measured recovery.  ALSO READ | Nifty PSU Bank index hits new high, rallies 21% since October on FPI buying 

Despite differing assumptions, brokerages remain constructive on valuation. Emkay reiterated a ‘Buy’ on Punjab National Bank stock and raised its target price to ₹150, citing improving profitability and a relatively inexpensive valuation of about 0.8 times adjusted book value. Motilal Oswal also maintained a ‘Buy’ with a target of ₹145, while JM Financial retained an ‘Add’ rating with a revised target of ₹135.

 

The quarter highlighted PNB’s focus on balance sheet strength rather than margin-led growth. Core earnings remain under pressure, but steady improvement in asset quality, conservative provisioning and reasonable valuations continue to provide comfort to brokerages on the bank’s medium-term outlook.

   

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