Markets
Are PNB investors worried about QIP-led dilution?
Summary
- PNB’s shares have been falling ever since the capital raising plans became known with the June quarter results. Though the results were good, the stock has corrected by about 15% from the post-result peak.
MUMBAI :
Sometimes corporates are better off raising money when they can rather than when they need. Punjab National Bank Ltd (PNB), India’s second-largest public sector bank after State Bank of India Ltd (SBI) in terms of total business and deposits, seems to have followed that logic.
With a capital adequacy ratio (CAR) of 15.79% and common equity tier 1 (CET-1) at 10.95%, PNB does not need capital immediately. Still, it is raising funds through a qualified institutional placement (QIP) at the floor price of ₹109.16 apiece with a maximum discount of 5% to the price. The total size could be up to ₹5,000 crore. At the floor price, it could lead to a maximum equity dilution of about 4%, as the current number of equity shares is 11 billion. It should not have any material impact on the book value of ₹93 per share for FY24.
PNB’s shares have been falling ever since the capital raising plans became known, along with the June quarter results (Q1FY25). Though the results were good, with a positive outlook for the remainder of FY25, the stock has corrected by about 15% from the post-result peak. Does that mean the Street is not happy with the equity dilution? The answer is no.
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In general, PSU stocks appear to have peaked—the Nifty PSE index has been sliding after hitting an all-time high of 11,814.6 on 1 August. Even for the two leading PSU Banks, the trend is no different from other PSUs. While the quantum of the decline in SBI and PNB stocks might be different, the fact that the Nifty Private Bank index has gained 6% since 1 August vis-à-vis the 9% fall in the Nifty PSU Bank index suggests that investor preference has shifted from PSU banking stocks to private sector peers.
What explains the shift?
Private sector banks, by virtue of their higher return on assets (RoA), have always commanded higher valuation multiple versus their PSU peers. However, some time ago, the severe undervaluation of PSU banks, even after adjusting for lower RoA, had tempted value investors. Consequently, the Nifty PSU Bank index rose by 89% in FY24 compared to the Nifty Private Bank index’s 14% gain. Now, the trade is getting reversed.
PNB’s shareholding pattern reveals that foreign institutional investors (FIIs) have noted the gradual improvement in its performance. FIIs have increased their stake from 1.82% in June 2023 to 5.51% in June 2024. The bank’s RoA rose from 0.18% in FY23 to 0.54% in FY24. PNB is looking to end FY25 with an RoA of 1%. Asset quality has become healthy as Gross NPA (GNPA) and Net NPA (NNPA) fell to 5.73% and 0.73% year-on-year in FY24 from 8.74% and 2.72%, respectively.
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PNB’s credit growth guidance for FY25 is 11-12%. It aims to increase the share of retail, agricultural and MSME in loan book from 55% in Q1FY25 to 60% ahead. The bank has an excess SLR of about ₹1 trillion that can be liquidated, if necessary, to fund the loan book, which helps in avoiding the need for aggressively raising expensive term deposits. PNB’s price-to-book-value based on Bloomberg consensus estimates is reasonable at 1x for FY25 and 0.9x for FY26 even for sub 1% RoA.
