Punjab National Bank has implemented a 20 basis points reduction in deposit rates across all tenures effective January 1, 2026, as the state-owned lender grapples with mounting pressure on net interest margins following a series of RBI rate cuts. Managing Director and Chief Executive Ashok Chandra indicated that further deposit rate cuts remain on the table as the bank seeks to restore margin stability.

Margin Compression Intensifies Pressure

The bank's domestic net interest margin has experienced significant compression, falling to concerning levels amid the challenging rate environment. The following table illustrates the deterioration in key margin metrics:

The data reveals that while deposit costs have remained relatively sticky, declining only marginally from 5.18% to 5.10%, loan yields have fallen more sharply, creating the margin squeeze that is driving the bank's aggressive repricing strategy.

Strategic Response to RBI Rate Cuts

Chandra acknowledged that deposit rate cuts had been limited so far due to a "dynamic" market environment and the need to balance depositor interests. However, the mounting margin strain is now pushing the case for faster repricing. The Reserve Bank of India has implemented 125 basis points of rate cuts since February 2025, including a 25 basis points reduction in December 2025, adding significant pressure on banking margins.

"As of now also, hardly 80 bps rate cut has happened in any segment in our deposit. So there is still enough room," Chandra told Mint, indicating the bank's readiness for further adjustments. The bank's asset-liability committee will assess the impact of the latest rate cut at month-end before determining future deposit rate strategies.

Financial Performance and Outlook

Despite margin pressures, PNB delivered solid financial results for the quarter. The bank's performance metrics demonstrate resilience amid challenging conditions:

The Casa ratio declined to 37.10% from 37.30% in the previous quarter and 38.10% a year earlier, reflecting the challenging deposit environment.

Repricing Strategy and Future Expectations

Management expects margins to stabilize through strategic repricing of the bank's special 440-day term deposit scheme launched last year, through which PNB raised over ₹2.80 trillion at rates of 7.25% and 7.75%. Chandra revealed that 70% repricing has occurred up to December 31, with 21% scheduled for repricing in the March quarter and the remaining 9% in Q1FY27.

"For Q4, we expect our NIM to remain at around the same levels as that of Q3 despite the full impact of December rate cut in Q4," Chandra stated during the bank's Q3 earnings call on January 19. The bank expects full-year FY26 domestic NIM to remain above FY25's 2.70%.

Market Analysis and Challenges

Brokerage firm Elara Capital flagged continued pressure in a post-earnings note, highlighting that PNB's Q3 NIM decline of 8 basis points sequentially came in below estimates and declined more sharply than peers. Elara expects full-year FY26 NIM at 2.40%, significantly below PNB's revised guidance of 2.80%-2.90%, which was already reduced from the original 2.90%-3.00% target.

Weighted average rates on domestic term deposits across the banking system fell to 6.80% in November 2025 from 7.20% in February 2025, according to RBI data, indicating the broader industry challenge in managing deposit costs amid the rate cutting cycle.

Punjab National Bank shares extended their decline for a second consecutive session, falling 2% to ₹125.50 on Tuesday, as investors weighed margin pressures against strong profit performance in the December quarter results. The stock has declined approximately 5% over the past two trading sessions since the quarterly results announcement on Monday.

Financial Performance Overview

Despite the market reaction, PNB reported robust headline numbers for the December quarter. The state-run lender posted a 13% year-on-year increase in net profit to ₹5,100 crore, supported by recoveries, treasury gains, and improving asset quality metrics.

Margin Pressure Concerns

The primary concern driving the stock decline has been the contraction in net interest margins. PNB's NIM fell 8 basis points quarter-on-quarter to 2.52%, prompting the bank to revise its FY26 NIM guidance downward to 2.6% from the earlier range of 2.8-2.9%.

Net interest income rose just 1% quarter-on-quarter, with loan yields declining 21 basis points, partially offset by an 8 basis point reduction in funding costs.

Asset Quality Improvements

On a positive note, asset quality metrics continued their improvement trajectory. Gross non-performing assets declined 26 basis points sequentially to 3.19%, while net NPAs stood at 0.32%. Slippages remained controlled below 0.7% on an annualized basis at ₹219.0 billion.

Brokerage Views

Analyst opinions remain divided on the stock's prospects. Citi maintained its 'Sell' rating despite revising FY26 and FY27 earnings upward, citing persistent margin pressure and limited levers to support NIMs. The brokerage noted that floating provisions of ₹9.6 billion were created towards expected credit loss transition.

Morgan Stanley highlighted that while profit after tax beat estimates by 12%, the core business showed weakness with pre-provision operating profit missing estimates by 10% due to weaker net interest income and higher operating expenses. However, fee income provided a bright spot, rising 15% year-on-year and exceeding estimates by 5%.

In contrast, Motilal Oswal Financial Services maintained a 'Buy' rating with a target price of ₹145, describing the quarter as modest but noting that other income supported earnings while asset quality remained robust.

Business Growth Metrics

Loan growth remained healthy at approximately 10% year-on-year, led by MSME and corporate loans. The sanction pipeline remained strong at ₹21.02 trillion, indicating sustained business momentum. However, there were concerns about moderating business growth and a marginal weakening in capital adequacy, with CET-1 ratio slipping to 12.5% from 12.8% in the first quarter of FY26.