3q fy15 results update| sector: financials punjab national...

3 February 2015

3QFY15 Results Update | Sector: Financials

Punjab National Bank

Alpesh Mehta ([email protected]); +91 22 3982 5415

Vallabh Kulkarni ([email protected]); +91 22 3982 5430

BSE SENSEX S&P CNX CMP: INR177 TP: INR260 (+46%) Buy 29,000 8,757

Bloomberg PNB IN

Equity Shares (m) 362.1

M.Cap. (INR b) / (USD b) 337.3/5.5

52-Week Range (INR) 232/105

1, 6, 12 Rel. Per (%) -23/-21/17

Avg Val INRm/Vol ‘000 1180/1866

Free float (%) 41

Financials & Valuation (INR b)

y/e MAR 2015E 2016E 2017E

NII 173 201 238

OP 122 144 175

NP 37 50 68

NIM (%) 3.2 3.3 3.4

EPS (INR) 21 28 38

EPS Gr. (%) 11.4 35.0 35.3

BV/Sh. INR 208 233 266 ABV/Sh. ( )

151 170 200

ROE (%) 10.3 12.6 15.0

ROA (%) 0.6 0.8 0.9

Div Payout 11.6 11.6 11.6

P/E(x) 8.6 6.4 4.7

P/BV (x) 0.8 0.8 0.7

Weak asset quality and high tax provisioning mars earnings Punjab National Bank’s (PNB) 3QFY15 PAT (+3% YoY) missed estimates by 13%,

despite high contribution of net trading gains (INR6.6b - 50% of PBT). Sharp rise in slippages to INR55.5b (INR39.7b in 2Q) – 6.8% of annualized loans, impacted NIM (+3bp QoQ vs expectation of +15bp QoQ) and led to NII (flat YoY) miss of 5%

Fresh restructuring declined QoQ to INR24.6b (3% of loans) vs INR33b (4.2%). Led by relapse from RL/repayments, OSRL declined INR343b (9.5% of loans) v/s INR368b (10.3%). Net stress addition (net slippages + change in OSRL) came in at INR14.2b (1.8%) v/s INR50.5b (6.4%) in 2QFY15. Management guided for continued pressure on asset quality for at least next two quarters.

Other highlights: (1) Fees grew 6% YoY (flat QoQ) (2) Loans growth remained moderate (+2% QoQ and 11% YoY) while deposits grew 2% QoQ and 15% YoY (3) CASA ratio stable QoQ at ~40% (4) PCR including technical write offs declined 185bp QoQ to 57.3% (5) High tax rate of 40% (est. of 32%) – a drag on profitability (PBT miss of just 2%) and (6) CET 1 of ~8.7% including 9MFY15 PAT

Valuation and view: Balance sheet consolidation helped PNB to improve the liability profile and keep NIM at 3%+, despite high asset quality strain and volatility in interest rate. NSL (ex SEB and AI) at 11% remains significantly higher than industry however, ~55% of RL belong to Infrastructure and Iron and steel and kick start in these segments could allay concerns. While net trading gains compensated for weak core performance (PBT raise of 2%), we cut PAT estimates by ~5% for FY15 to factor in high tax rate. ROA/ROE expected to be better than peers at 0.8%/14%. Buy

Investors are advised to refer through disclosures made at the end of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

http://www.motilaloswal.com/Institutional-Equities�

3 February 2015 2


Exhibit 1: Quarterly Performance: Actual v/s estimates (INR m) Y/E MARCH 3QFY15A 3QFY15E Var. (%) Comments

Net Interest Income 42,331 44,346 -5 Margin stable QoQ vs expectation of +15bp (Gross slippages expected to decline QoQ post sharp rise in 2Q) % Change (Y-o-Y) 0 5

Other Income 12,908 13,082 -1 Muted fees (+6% YoY) compensated by higher trading gains

Net Income 55,239 57,427 -4

Operating Expenses 27,732 27,207 2 Operating Profit 27,507 30,220 -9

% Change (Y-o-Y) 2 12

Other Provisions 14,678 17,160 -14 MTM write-back helps; credit cost remains elevated at 1.9%

Profit before Tax 12,830 13,060 -2 Tax Provisions 5,084 4,179 22 Tax rate at 40% v/s expectation of 32%

Net Profit 7,746 8,881 -13 Trading gains compensated weak core revenues, high tax rate led to 13% PAT miss % Change (Y-o-Y) 3 17.6

Source: MOSL, Company

Slippages increase sharply QoQ however, net stress addition declines QoQ Gross slippages increased to INR55.5b (annualized slippage ratio of 6.8%) from

INR39.7b (5.1%) in 2QFY15. Of this, INR12b came in from loans which were already restructured. During 9MFY15, out of total slippages of INR110b, INR40b came from accounts which were already restructured.

Upgrades and recoveries increased to INR16.7b as compared to INR17.1b in 2QFY15. Net slippages for the quarter came in at INR38.8b (4.8%) v/s INR22.6b (2.9%) in 2QFY15.

During the quarter, bank wrote-off INR24.2b (INR11.2b in 2QFY15) and resultantly, GNPA in absolute terms increased 7% QoQ. In percentage terms GNPA and NNPA was at 6.0% (5.7% in 1QFY15) and 3.8% (3.3% in 2QFY15). PCR declined QoQ to 38% from 44% in 2QFY15 (57.2% - including technical write-off vs 59.1% in 2Q).

Fresh restructuring during the quarter stood at INR24.5b (INR32.9b in 2QFY15). Hence net stress addition declined QoQ to INR14.2b (INR50.5b in 2QFY15 and INR4.5b in 1QFY15). Net stress loans declined to 13.3% compared to 13.6% in 2QFY15 led by reduction in OSRL.

Other highlights NIM for the quarter came in at 3.2% (stable QoQ) v/s expectation of 15bp

improvement QoQ. Yield on loans declined 4bp QoQ to 9.86%. Cost of funds was largely stable at 5.1%.

Opex grew 13% YoY led by 15% growth in employee related expenses. Cost to core income ratio declined 210bp to 56% in 3QFY15.

Loan and deposits growth was moderate at 11% YoY (+2% QoQ) and 15% YoY (+2% QoQ) respectively. Domestic loans grew just 8% YoY and +2% QoQ. PNB capitalized on one off opportunity to grow its international loans (+40% YoY)

CASA growth remains moderate at 8% YoY (+5% QoQ) led by moderate growth in CA deposits (+9% YoY and +1% QoQ) and SA deposits (+7% YoY and 1% QoQ). Domestic CASA ratio stood at 39.4%.

Retail advances grew 28% YoY in 3QFY15 led by strong growth in Car/vehicle segment (+21% YoY) and Housing segment (+23% YoY). MSME segment grew

Net stress loans stood at 13.3%; OSRL declined 7%

QoQ

Loan and deposits growth was moderate at 11% YoY

(+2% QoQ) and 15% YoY (+2% QoQ) respectively.

3 February 2015 3


19% YoY (+8% QoQ) and now forms 16% of overall loans. While, Agriculture loans grew 5% QoQ and +20% YoY.

Growth in infrastructure financing moderated to 6% YoY (flat QoQ) which was led by slowdown in telecom segment (-6% YoY and -1% QoQ).

Growth in food processing segment was strong at 38% YoY (+30% QoQ), however formed just 3.1% of overall loans.

Credit costs during 3QFY15 came in at INR 17.2b (1.9% of loans). Bank benefited from the decline in systemic yields with trading gains of INR2.1b (INR1.2b in 2Q) and reversal of MTM provisions on investment book of INR4.5b (INR260m in 2Q).

Conference call highlights

P&L related Provision break-up: NPA provision (INR17.2b); Standard assets (INR1.4b),

Investment depreciation (INR -4.5b); Others (INR0.6b) Non-interest income break-up: Commissions (INR7.2b); Forex Income (INR1.8b);

Trading gains (INR2.1b); Recovery from w/off accounts (INR1.1b), Dividend from MF (INR 0.8b)

Tax rate higher (40%) on account of higher write-back on investment depreciation

Increase in C/I ratio on account of pension related provisioning (INR8.5b) vs (INR6.5b in 3QFY14)

Asset Quality Higher stress expected over the next 2 quarters; recoveries to pickup Q4

onwards Movement of NPA: Slippage (INR55.5b), Cash recovery (INR10.8b), Upgrades

(INR5.8b) and Write-offs (INR24b) Sector-wise GNPA (INR222b): Agriculture (INR33.2b), MSME (INR56b), Retail

(INR10b), Others (INR123b; incl. Iron & Steel INR24b, Textiles INR10b) O/S Restructured loans at INR343b, out of which SEB INR58b, AI INR16b Restructuring pipeline at INR6.5b Slippage from restructuring book in 3Q - INR12b; 11.8% slippage & 10.2%

upgrades from restructuring book in 9MFY15 Out of INR110b slippages in 9MFY15, INR40b came from restructured loans Others Market Share in Deposits - 4.9%; Market Share in Credit - 4.9% CET 1 including 9M profits at 8.7% SLR cut of 50bps is going to release INR25b but do not see the money getting

deployed due to lack of credit demand PNB raised INR15b through AT1 bonds during the quarter The bank is planning for QIP/FPO post March 2015

3 February 2015 4


Valuation and view Gross slippages increased QoQ led by though macro environment and continued

relapse from restructured loans. PNB remains highly levered to resolution of policy bottlenecks and improvement in economic growth. NSL (ex SEB and AI) at 11% remains significantly higher than industry however, ~55% of RL belong to Infrastructure and Iron and steel and kick start in these segments could allay concerns.

Balance sheet consolidation helped PNB to improve the liability profile and keep NIM at 3%+, despite high asset quality strain and volatility in interest rate.

While net trading gains compensated for weak core performance (PBT raise of 2%), we cut PAT estimates by ~5% for FY15 to factor in high tax rate. We tweak estimates for FY16/17 by ~4%/2%. ROA/ROE is expected to be better than peers at 0.8%/14%. PNB trades at 0.8x/0.7x FY16/17 BV. Buy with a target price of INR260 (1.0x FY17 BV).

Exhibit 2: Cut in FY15 estimates driven by higher tax rate

INR B Old Est. Rev. Est. Chg. (%)

FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17 Net Interest Income 175.4 200.7 233.6 172.9 200.8 238.0 -1.5 0.0 1.9 Other Income 55.9 63.4 72.1 55.7 62.9 70.4 -0.3 -0.7 -2.4 Total Income 231.3 264.1 305.8 228.6 263.7 308.4 -1.2 -0.2 0.9 Operating Expenses 106.1 118.5 132.4 107.0 119.4 133.5 0.8 0.8 0.8 Operating Profits 125.2 145.7 173.4 121.6 144.2 175.0 -2.9 -1.0 0.9 Provisions 64.2 68.5 71.3 59.5 69.8 74.3 -7.2 1.9 4.1 PBT 61.0 77.2 102.1 62.1 74.5 100.7 1.7 -3.5 -1.3 Tax 22.0 25.1 33.2 24.8 24.2 32.7 13.0 -3.5 -1.3 PAT 39.0 52.1 68.9 37.2 50.3 68.0 -4.6 -3.5 -1.3 Margins (%) 3.23 3.27 3.28 3.21 3.32 3.41 Credit Cost (%) 1.75 1.55 1.35 1.75 1.65 1.50 RoA (%) 0.67 0.78 0.88 0.65 0.78 0.91 RoE (%) 10.8 13.0 15.1 10.3 12.6 15.0


Exhibit 3: One year forward P/BV


Exhibit 4: One year forward P/E


0.8

1.8

1.2

0.40.0

0.5

1.0

1.5

2.0

Jan-

05

Apr

-06

Jul-

07

Oct

-08

Jan-

10

Apr

-11

Jul-

12

Oct

-13

Jan-

15

PB (x) Peak(x) Avg(x) Min(x)

6.9

10.0

7.0

2.82

5

7

10

12

Jan-

05

Apr

-06

Jul-

07

Oct

-08

Jan-

10

Apr

-11

Jul-

12

Oct

-13

Jan-

15

PE (x) Peak(x) Avg(x) Min(x)

Buy with a target price of INR260 (1.0x FY17E BV).

3 February 2015 5


Exhibit 5: DuPont Analysis: Highly levered to macro-economic conditions – expect RoA to improve gradually (%) FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E Net Interest Income 3.26 3.39 3.06 3.06 3.12 3.50 3.21 3.17 3.14 3.01 3.11 3.20 Fee income 0.58 0.66 0.64 0.64 0.68 0.65 0.61 0.53 0.54 0.54 0.55 0.55

Fee to core income 15.13 16.23 17.36 17.25 17.93 15.72 16.09 14.40 14.61 15.23 15.11 14.72 Core Operating Income 3.84 4.05 3.71 3.70 3.80 4.15 3.82 3.70 3.67 3.55 3.67 3.76 Operating Expenses 2.23 2.16 1.95 1.89 1.75 1.89 1.67 1.74 1.81 1.86 1.85 1.80

Cost to Core Income Ratio 58.05 53.45 52.64 50.95 46.09 45.43 43.81 47.07 49.39 52.47 50.50 47.81 Employees 1.56 1.53 1.36 1.31 1.15 1.32 1.13 1.21 1.26 1.32 1.30 1.24

Emp cost to Opex (%) 69.96 70.72 69.82 69.53 65.54 70.10 67.45 69.50 69.72 70.94 70.05 69.18 Others 0.67 0.63 0.59 0.57 0.60 0.56 0.54 0.53 0.55 0.54 0.55 0.55

Core operating Profits 1.61 1.88 1.75 1.82 2.05 2.27 2.15 1.96 1.86 1.69 1.82 1.96 Trading and others 0.54 0.47 0.46 0.74 0.65 0.42 0.39 0.37 0.35 0.43 0.42 0.39 Operating Profits 2.15 2.35 2.22 2.55 2.70 2.68 2.54 2.33 2.21 2.11 2.24 2.35 Provisions 0.65 0.94 0.39 0.41 0.52 0.74 0.86 0.94 1.30 1.04 1.08 1.00

NPA 0.05 0.39 0.21 0.37 0.37 0.59 0.57 0.71 0.88 1.13 1.08 0.98 Othes 0.60 0.55 0.18 0.05 0.16 0.14 0.28 0.22 0.42 -0.09 0.01 0.02

PBT 1.50 1.41 1.82 2.14 2.17 1.94 1.68 1.39 0.91 1.08 1.15 1.36 Tax 0.44 0.41 0.69 0.75 0.74 0.63 0.51 0.38 0.26 0.43 0.38 0.44

Tax Rate 29.27 29.00 37.84 35.16 33.86 32.45 30.59 27.20 28.74 40.00 32.50 32.50 RoA 1.06 1.00 1.13 1.39 1.44 1.31 1.17 1.01 0.65 0.65 0.78 0.91 Leverage (x) 16.04 16.01 17.27 18.64 18.54 18.64 18.03 16.26 15.67 15.93 16.14 16.45 RoE 17.01 16.03 19.58 25.84 26.64 24.49 21.05 16.48 10.18 10.32 12.58 15.05


Exhibit 6: DuPont Analysis: Strong opex control and lower NPA provisioning led to QoQ improvement in profitability (%) Y/E MARCH 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15

Net Interest Income 3.22 3.13 3.17 3.18 3.26 3.29 3.32 2.99 3.19 2.98 2.97 Fee income 0.64 0.50 0.50 0.50 0.62 0.48 0.54 0.56 0.60 0.52 0.53

Fee to core income (%) 16.56 13.70 13.65 13.65 16.07 12.74 13.88 15.75 15.92 14.77 15.23 Core Income 3.86 3.63 3.67 3.69 3.88 3.77 3.86 3.54 3.80 3.50 3.50 Operating Expenses 1.76 1.74 1.72 1.77 1.90 1.95 1.93 1.66 1.82 2.04 1.94

Cost to Core Income (%) 45.64 47.84 46.78 48.04 48.88 51.72 50.13 46.85 47.82 58.18 55.53 Employee cost 1.24 1.23 1.20 1.20 1.35 1.36 1.38 1.10 1.29 1.46 1.42

Emp cost to Opex (%) 70.27 70.54 69.61 67.65 71.01 69.69 71.55 66.41 70.96 71.79 73.15 Others 0.52 0.51 0.52 0.57 0.55 0.59 0.55 0.56 0.53 0.57 0.52

Core operating Profits 2.10 1.89 1.95 1.92 1.98 1.82 1.92 1.88 1.98 1.46 1.56 Trading and others 0.38 0.28 0.32 0.49 0.49 0.26 0.20 0.48 0.30 0.60 0.37 Operating Profits 2.48 2.18 2.28 2.40 2.48 2.08 2.13 2.37 2.28 2.07 1.93 Provisions 0.90 0.92 0.68 1.25 0.89 1.56 1.25 1.60 0.68 1.27 1.03

NPAs 0.78 0.98 0.40 0.70 0.56 0.82 0.85 1.31 1.00 1.18 1.14 Others 0.12 -0.06 0.29 0.55 0.33 0.73 0.40 0.29 -0.32 0.09 -0.11

PBT 1.58 1.25 1.60 1.16 1.59 0.52 0.88 0.77 1.60 0.80 0.90 Tax 0.49 0.34 0.49 0.21 0.53 0.11 0.28 0.17 0.58 0.38 0.36

Tax Rate (%) 31.12 26.97 30.56 17.70 33.14 20.53 32.09 22.07 36.06 48.08 39.63 RoA 1.09 0.92 1.11 0.95 1.06 0.41 0.59 0.60 1.02 0.41 0.54


3 February 2015 6


Story in charts

Exhibit 7: Loan growth mainly led by Retail and MSME segments


Exhibit 8: Deposit growth remains moderate


Exhibit 9: Margin have deteriorated over the last 2-3 quarters (%)


Exhibit 10: GNPA in absolute increased 7% QoQ; PCR declines QoQ


Exhibit 11: Net slippages increased sharply QoQ


Exhibit 12: Credit costs elevated (%)


2,42

9

2,49

0

2,62

6

2,93

8

2,94

5

2,94

7

2,97

3

3,08

8

3,05

1

3,13

9

3,26

1

3,49

3

3,47

5

3,57

1

3,62

5

2319 19 21 21

1813

5 4 6 1013 14 14 11

1QFY

12

1HFY

12

9MFY

12

FY12

1QFY

13

1HFY

13

9MFY

13

FY13

1QFY

14

1HFY

14

9MFY

14

FY14

1QFY

15

1HFY

15

9MFY

15

Loans (INR b) YoY Gr. (%)

3,24

1

3,41

8

3,56

5

3,79

6

3,85

4

4,00

7

3,85

8

3,91

6

3,96

8

4,05

7

4,20

6

4,51

4

4,44

9

4,73

5

4,84

1

27 2523 21 19 17

83 3 1

915

1217 15

1QFY

12

1HFY

12

9MFY

12

FY12

1QFY

13

1HFY

13

9MFY

13

FY13

1QFY

14

1HFY

14

9MFY

14

FY14

1QFY

15

1HFY

15

9MFY

15

Deposits (INR b) YoY Growth (%)

3.8 4.

0

3.9

3.5 3.

6

3.5

3.5 3.5

3.5

3.5 3.

6

3.2

3.4

3.2 3.2

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

2.0

2.1

2.4

2.9

3.3

4.7

4.6

4.3

4.8

5.1

5.0

5.3

5.4

5.7

6.0

0.9

0.8

1.1

1.5

1.7

2.7

2.6

2.4

3.0

3.1

2.8

2.9

3.0

3.3

3.8

57 59 5549 51

44 46 4640 42 45 47 47 44

38

1QFY

12

1HFY

12

9MFY

12

FY12

1QFY

13

1HFY

13

9MFY

13

FY13

1QFY

14

1HFY

14

9MFY

14

FY14

1QFY

15

1HFY

15

9MFY

15

GNPA (%) NNPA (%) PCR (cal %)

5.3

2.7

13.2

23.4

13.0

40.5

0.1

3.7

24.2

15.1

4.5

23.9

19.5

22.6

38.8

1.1 0.5

2.43.9

2.1

6.5

0.0 0.5

3.32.0

0.6

3.1 2.6 2.9

4.8

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

Net Slippages (INR b) Net Slipapge Ratio (%)

0.9

0.5

0.9

1.4

1.2

1.5

0.6

1.1

0.9

1.3 1.4

2.1

1.6 1.

9 1.9

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

3 February 2015 7


Exhibit 13: Quarterly Snapshot FY14 FY15 Variation (%) Cumulative Numbers INR m 1Q 2Q 3Q 4Q 1Q 2Q 3Q QoQ YoY 9MFY14 9MFY15 YoY Gr (%) Profit and Loss Interest Income 104,045 107,335 109,839 111,013 115,887 114,621 116,141 1 6 321,219 346,648 8 Loans 78,747 80,228 82,464 82,491 88,357 86,542 87,358 1 6 241,440 262,257 9 Investment 24,393 25,683 25,988 26,594 25,985 26,092 26,116 0 0 76,064 78,194 3 Others 905 1,424 1,387 1,928 1,544 1,987 2,667 34 92 3,715 6,198 67 Interest Expenses 64,970 67,180 67,628 70,995 72,090 73,109 73,810 1 9 199,778 219,009 10 Net Interest Income 39,075 40,155 42,211 40,018 43,797 41,512 42,331 2 0 121,442 127,640 5 Other Income 13,421 8,993 9,384 13,969 12,364 15,584 12,908 -17 38 31,798 40,856 28

Trading profits 2,840 530 240 1,890 1,490 1,250 2,110 69 779 3,610 4,850 34 Forex Income 1,620 1,610 1,070 1,140 970 1,280 1,750 37 64 4,300 4,000 -7 Recoveries 850 690 860 2,740 910 4,830 1,090 -77 27 2,400 6,830 185 Div. from Liquid MF 630 300 410 720 700 1,030 770 -25 88 1,340 2,500 87 Core Fees 7,481 5,863 6,804 7,479 8,294 7,194 7,188 0 6 20,148 22,676 13

Total Income 52,496 49,149 51,596 53,987 56,161 57,096 55,239 -3 7 153,240 168,496 10 Operating Expenses 22,758 23,800 24,572 22,253 24,908 28,335 27,732 -2 13 71,130 80,975 14

Employee 16,159 16,587 17,580 14,778 17,674 20,341 20,286 0 15 50,327 58,300 16 Others 6,598 7,213 6,991 7,475 7,235 7,995 7,446 -7 6 20,803 22,675 9

Operating Profits 29,738 25,348 27,024 31,734 31,253 28,760 27,507 -4 2 82,110 87,521 7 Provisions 10,665 18,987 15,900 21,387 9,276 17,679 14,678 -17 -8 45,553 41,633 -9

NPA provisions 6,750 10,050 10,830 17,550 13,660 16,380 17,230 5 59 27,630 47,270 71 Provisions on Invst. 920 4,430 2,190 280 -3,810 -260 -4,450 1,612 -303 7,540 -8,520 -213 Others 2,995 4,507 2,880 3,557 -574 1,559 1,898 22 -34 10,383 2,883 -72

PBT 19,073 6,361 11,123 10,347 21,977 11,081 12,830 16 15 36,558 45,888 26 Taxes 6,320 1,306 3,569 2,284 7,926 5,328 5,084 -5 42 11,196 18,337 64 PAT 12,753 5,055 7,554 8,064 14,051 5,753 7,746 35 3 25,362 27,550 9 Ratios (%) Fees to Total Income 14.2 11.9 13.2 13.9 14.8 12.6 13.0 13.1 13.5 Cost to Core Income 48.9 51.7 50.1 46.9 47.8 58.2 56.0 50.2 53.9 Tax Rate 33.1 20.5 32.1 22.1 36.1 48.1 39.6 30.6 40.0 CASA (Cal) 37.8 38.5 38.3 38.3 36.8 36.2 35.8 Loan/Deposit 76.9 77.4 77.5 77.4 78.1 75.4 74.9 Yield, cost movement (%) Yield on loans 10.5 10.4 10.6 9.9 10.3 9.9 9.9 -4 -74 Yield On Investments 7.8 7.9 7.8 7.9 8.0 8.0 8.1 6 21 Yield on Funds 8.5 8.4 8.4 8.0 8.3 8.0 8.0 0 -41 Cost of Deposits 6.4 6.4 6.3 6.1 6.1 6.1 6.1 -3 -22 Cost of Funds 5.3 5.3 5.2 5.1 5.1 5.1 5.1 -1 -9 Spreads 3.2 3.2 3.2 2.9 3.1 2.9 2.9 1 -32 Margins 3.5 3.5 3.6 3.2 3.4 3.2 3.2 3 -36 Margins - Cumulative (%) Yield on loans 10.5 10.5 10.5 10.4 10.3 10.1 10.0 -7 -50 Yield On Investments 7.8 7.8 7.8 7.9 8.0 8.0 8.0 2 16 Yield on Funds 8.5 8.4 8.4 8.3 8.3 8.1 8.1 -4 -34 Cost of Deposits 6.4 6.4 6.4 6.3 6.1 6.1 6.1 0 -28 Cost of Funds 5.3 5.3 5.2 5.2 5.1 5.1 5.1 -1 -13 Spreads 3.2 3.2 3.2 3.1 3.1 3.0 3.0 -3 -21 Margins 3.5 3.5 3.5 3.2 3.4 3.3 3.3 -3 -25 Franchise Branches 5,929 6,019 6,075 6,200 6,340 6,351 6,406 ATM 6,460 6,577 6,698 6,940 7,717 7,954 8,209


3 February 2015 8


Exhibit 14: Quarterly Snapshot continued FY13 FY14 FY15 Variation (%) INR b 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q QoQ YoY Balance Sheet Loans 2,945 2,947 2,973 3,088 3,051 3,139 3,261 3,493 3,475 3,571 3,625 2 11 Investments 1,207 1,290 1,305 1,299 1,330 1,341 1,434 1,438 1,383 1,446 1,432 -1 0 Assets 4,592 4,720 4,700 4,789 4,811 4,943 5,219 5,504 5,468 5,663 5,749 2 10 Deposits 3,854 4,007 3,858 3,916 3,968 4,057 4,206 4,514 4,449 4,735 4,841 2 15 Deposits Break Up Core Deposits 3,000 3,174 3,267 3,426 3,619 3,531 3,684 3,858 4,037 3,922 4,043 3 10 % of total Deposits 77.8 79.2 84.7 87.5 91.2 87.0 87.6 85.5 90.7 82.8 83.5 Other Deposits 854 833 591 489 350 526 523 656 412 814 798 -2 53 % of total Deposits 22.2 20.8 15.3 12.5 8.8 13.0 12.4 14.5 9.3 17.2 16.5 Deposits Break Up CASA Deposits 1,331 1,434 1,424 1,533 1,499 1,564 1,610 1,729 1,636 1,716 1,731 1 8 % of total Deposits 34.6 35.8 36.9 39.2 37.8 38.5 38.3 38.3 36.8 36.2 35.8 Savings 1,074 1,154 1,171 1,235 1,232 1,302 1,338 1,414 1,366 1,421 1,435 1 7 % of total Deposits 27.9 28.8 30.4 31.5 31.1 32.1 31.8 31.3 30.7 30.0 29.6 Current 257 280 253 299 267 262 271 315 271 295 297 1 9 % of total Deposits 6.7 7.0 6.6 7.6 6.7 6.5 6.5 7.0 6.1 6.2 6.1 Term Deposits 2,522 2,573 2,433 2,382 2,469 2,493 2,597 2,785 2,813 3,019 3,110 3 20 % of total Deposits 65.4 64.2 63.1 60.8 62.2 61.5 61.7 61.7 63.2 63.8 64.2 Loan Break Up Agriculture 446 403 418 381 370 409 441 531 489 505 531 5 20 SME Loans 310 307 312 336 348 365 437 465 446 480 518 8 19 Retail Loans 293 299 303 313 320 342 361 389 390 410 462 13 28 Other loans 1,896 1,939 1,941 2,059 2,013 2,022 2,023 2,109 2,150 2,177 2,114 -3 5 Investment book HTM 926 939 927 913 865 960 964 957 955 944 985 4 2 AFS and HFT 284 353 380 390 463 368 454 448 388 471 414 -12 -9 AFS (%) 23.48 27.34 29.10 29.96 34.88 27.69 32.02 31.87 28.90 33.28 29.58 -370 -245 SLR (%) 25.9 30.1 29.8 28.0 29.2 27.0 28.8 25.0 25.4 26.6 26.9 38 -187 M. duration (Yrs) - Portfolio 4.46 4.59 4.70 4.56 4.82 4.62 4.56 4.51 4.69 4.24 4.04

AFS 2.72 3.66 4.35 4.17 4.66 3.77 4.05 4.29 4.24 3.53 3.82 Asset Quality Movement of NPA -Quarterly Opening 87.2 99.9 140.2 140.0 134.7 150.9 165.3 165.9 188.8 196.0 207.5 Additions 27.7 45.4 3.6 9.7 35.9 23.8 11.4 37.0 29.6 36.2 45.8 Deductions 15.0 5.1 3.9 15.0 19.7 9.4 10.7 14.1 22.3 24.7 31.2 Cash Recovery 5.7 3.8 5.5 4.4 8.0 6.7 6.3 5.0 7.5 8.9 5.9 Upgradation 9.0 1.1 -2.0 1.5 3.7 2.0 0.6 8.1 2.6 4.6 1.1 Write offs 0.3 0.2 0.4 9.1 8.0 0.7 3.8 1.0 12.2 11.2 24.2 Closing 99.9 140.2 140.0 134.7 150.9 165.3 165.9 188.8 196.0 207.5 222.1 Net Slippages 13.0 40.5 0.1 3.7 24.2 15.1 4.5 23.9 19.5 22.6 38.8 71 756 Net Slippage Ratio (%) 2.15 6.51 0.02 0.51 3.29 2.05 0.61 3.09 2.55 2.89 4.75 187 414 Credit cost (%) 1.22 1.55 0.63 1.10 0.88 1.30 1.35 2.08 1.57 1.86 1.92 6 56


3 February 2015 9


Corporate profile: Punjab National Bank

Exhibit 16: Shareholding pattern (%) Dec-14 Sep-14 Dec-13

Promoter 58.9 58.9 58.9

DII 19.4 19.6 18.5

FII 17.3 17.4 17.5

Others 4.3 4.1 5.1

Note: FII Includes depository receipts

Exhibit 17: Top holders Holder Name % Holding

LIC of India Money Plus 1 Secured Fund (31) 11.2 Lazard Asset Management LLC A/c Lazard Emerging

3.8

HDFC Trustee Company Ltd HDFC Capital Protection

2.3

ICICI Prudential Nifty ETF (21) 1.2

Exhibit 18: Top management Name Designation

Gauri Shankar Executive Director

K Veera Brahmaji Executive Director

Dr. Ram S. Sangapure Executive Director

D K Jain General Manager (Treasury)

Exhibit 19: Directors Name Name

Dilip Kumar Saha R S Sangapure

Tara Chand Jhalani Gauri Shankar

Gautam Premnath Khandelwal K Veera Brahmaji

D K Singla Anurag Jain

Sunil Gupta B P Kanungo

M N Gopinath

*Independent

Exhibit 20: Auditors

Name Type

Borkar & Mazumdar Statutory CVK & Associates Statutory G S Madhava Rao & Co Statutory K N Gutgutia & Co Statutory Phillipos & Co Statutory Ramesh Kapoor & Co Statutory

Exhibit 21: MOSL forecast v/s consensus EPS

(INR) MOSL

forecast Consensus

forecast Variation

(%)

FY15 20.6 23.8 -13.7 FY16 27.8 30.9 -10.2 FY17 37.5 38.0 -1.1

Company description Punjab National Bank (PNB) was incorporated in 1894 in Lahore. It is one of India’s largest nationalized public sector banks in terms of business and number of branches. As of December 2014, it had loan book size of INR3.6t and deposits of INR4.8t. It has a wide distribution network having pan-India presence with a total of 6,406 branches and 8,209 ATMs. Government holds 59% stake in the bank.

Exhibit 15: Sensex rebased

100

130

160

190

220

250

Feb-14 May-14 Aug-14 Nov-14 Feb-15

Punjab Natl.Bank Sensex - Rebased

3 February 2015 10


Exhibit 1: Financials - Valuation metrics

61.89 Rating CMP Mcap EPS (INR) P/E (x) BV (INR) P/BV (x) RoA (%) RoE (%)

(INR) (USDb) FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17

ICICIBC* Buy 347 32.3 23.0 27.1 12.2 10.0 132 152 2.1 1.8 1.9 1.9 15.7 16.2

HDFCB Buy 1,063 41.2 52.5 63.8 20.3 16.7 254 303 4.2 3.5 2.0 2.0 22.4 22.9

AXSB Buy 587 22.3 36.7 42.4 16.0 13.8 220 256 2.7 2.3 1.8 1.7 17.9 17.8

KMB* Neutral 1,308 16.3 49.2 60.4 26.6 21.7 371 427 3.5 3.1 1.9 1.9 14.3 15.0

YES Buy 807 5.4 60.4 76.2 13.4 10.6 330 391 2.4 2.1 1.7 1.7 19.7 21.1

IIB Buy 864 7.3 43.2 53.2 20.0 16.2 228 272 3.8 3.2 2.0 2.0 20.5 21.3

VYSB Neutral 913 2.8 40.8 52.1 22.4 17.5 428 469 2.1 1.9 1.0 1.1 9.9 11.6

FB Buy 143 2.0 12.9 15.1 11.1 9.5 100 112 1.4 1.3 1.2 1.2 13.6 14.3

JKBK Buy 150 1.2 19.5 23.5 7.7 6.4 144 162 1.0 0.9 1.1 1.2 14.3 15.4

SIB Buy 28 0.6 3.7 4.7 7.5 5.9 29 33 0.9 0.8 0.8 0.9 13.3 15.2

Private Agg. 131.4 18.0 15.1 3.0 2.6

SBIN (cons)* Buy 300 36.2 29.9 37.2 9.6 7.7 232 263 1.2 1.1 0.8 0.9 13.2 14.8

PNB Buy 177 5.2 28.8 38.1 6.1 4.6 235 268 0.8 0.7 0.8 0.9 13.0 15.1

BOI Neutral 261 2.7 61.2 76.8 4.3 3.4 478 545 0.5 0.5 0.6 0.6 13.6 15.0

BOB Neutral 185 1.3 25.2 30.5 7.3 6.1 186 209 1.0 0.9 0.7 0.7 14.3 15.4

UNBK Buy 205 2.1 37.3 49.0 5.5 4.2 321 362 0.6 0.6 0.6 0.7 12.2 14.4

INBK Buy 183 1.4 29.4 33.5 6.2 5.5 289 314 0.6 0.6 0.6 0.6 10.6 11.1

CRPBK Neutral 67 0.2 16.5 21.9 4.1 3.1 141 158 0.5 0.4 0.5 0.6 12.3 14.7

ANDB Buy 92 0.9 18.6 24.0 4.9 3.8 169 186 0.5 0.5 0.5 0.6 11.4 13.5

IDBI Neutral 70 1.8 14.4 19.7 4.8 3.5 157 173 0.4 0.4 0.6 0.7 9.5 11.9

DBNK Neutral 57 0.5 13.6 16.8 4.2 3.4 137 150 0.4 0.4 0.5 0.5 10.3 11.7

Public Agg. 52.2 7.9 6.3 0.9 0.8

HDFC* Buy 1,232 31.1 38 46 21.9 16.7 165 192 5.1 4.0 2.5 2.5 23.8 24.9

LICHF Buy 470 3.8 32 39 14.5 12.0 197 229 2.4 2.1 1.4 1.4 17.6 18.4

DEWH Buy 508 1.1 63 79 8.1 6.4 358 417 1.4 1.2 1.4 1.4 18.7 20.4

IHFL Buy 604 3.5 64 79 9.4 7.6 215 246 2.8 2.5 4.2 4.3 32.4 34.3

IDFC Neutral 173 4.5 13 14 13.8 12.1 109 120 1.3 1.2 2.2 2.2 11.5 12.0

RECL Buy 336 5.4 67 78 5.0 4.3 301 361 1.1 0.9 3.5 3.4 24.5 23.4

POWF Buy 288 6.1 57 69 5.0 4.2 292 344 1.0 0.8 3.1 3.1 21.2 21.7

SHTF Buy 1,176 4.3 78 92 15.1 12.8 494 573 2.4 2.1 2.3 2.4 16.3 17.7

MMFS Neutral 257 2.3 17 21 14.9 12.0 113 129 2.3 2.0 2.6 2.8 16.1 17.7

BAF Buy 4,178 3.4 219 267 19.1 15.7 1,137 1,360 3.7 3.1 2.9 2.9 21.0 21.4

NBFC Agg. 65.5 14.3 12.0 2.7 2.3

*Multiples adj. for value of key ventures/Investments; For ICICI Bank and HDFC Ltd BV is adjusted for investments in subsidiaries

3 February 2015 11


Financials and valuations

Income Statement (INR Million) Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E

Interest Income 214,221 269,865 364,761 418,858 432,233 468,301 523,488 591,780 Interest Expense 129,440 151,791 230,617 270,368 270,773 295,399 322,717 353,734

Net Interest Income 84,781 118,073 134,144 148,490 161,460 172,902 200,771 238,046 Change (%) 24.1 39.3 13.6 10.7 8.7 7.1 16.1 18.6

Non Interest Income 36,101 36,126 42,026 42,234 45,767 55,726 62,903 70,403

Net Income 120,882 154,199 176,170 190,724 207,227 228,628 263,675 308,448 Change (%) 22.1 27.6 14.2 8.3 8.7 10.3 15.3 17.0

Operating Expenses 47,619 63,642 70,028 81,651 93,382 107,034 119,435 133,470

Pre Provision Profits 73,263 90,557 106,143 109,074 113,845 121,594 144,239 174,978 Change (%) 28.7 23.6 17.2 2.8 4.4 6.8 18.6 21.3

Provisions (excl tax) 14,215 24,920 35,772 43,856 66,939 59,533 69,787 74,275

PBT 59,048 65,637 70,370 65,218 46,905 62,061 74,453 100,703 Tax 19,994 21,302 21,528 17,741 13,479 24,825 24,197 32,728 Tax Rate (%) 33.9 32.5 30.6 27.2 28.7 40.0 32.5 32.5

PAT 39,054 44,335 48,842 47,477 33,426 37,237 50,256 67,975 Change (%) 26.4 13.5 10.2 -2.8 -29.6 11.4 35.0 35.3

Equity Dividend (Incl tax) 8,101 8,101 8,672 11,166 4,236 4,338 5,855 7,919

Core PPP* 62,069 82,432 97,584 99,995 103,201 105,694 126,839 156,578 Change (%) 32.2 32.8 18.4 2.5 3.2 2.4 20.0 23.4

*Core PPP is (NII+Fee income-Opex) Balance Sheet (INR Million) Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E Share Capital 3,153 3,168 3,392 3,535 3,621 3,621 3,621 3,621 Equity Share Capital 3,153 3,168 3,392 3,535 3,621 3,621 3,621 3,621 Reserves & Surplus 174,076 211,917 274,762 323,234 355,332 388,438 432,632 492,894

Net Worth 177,229 215,086 278,154 326,769 358,953 392,059 436,253 496,515

Deposits 2,493,298 3,128,987 3,795,885 3,915,601 4,513,967 5,033,074 5,838,366 6,772,504 Change (%) 18.9 25.5 21.3 3.2 15.3 11.5 16.0 16.0

of which CASA Dep 1,018,500 1,203,250 1,341,293 1,533,443 1,728,721 1,866,250 2,146,187 2,468,116 Change (%) 25.0 18.1 11.5 14.3 12.7 8.0 15.0 15.0

Borrowings 192,624 315,897 372,643 396,209 480,344 390,334 415,373 430,797 Other Liabilities & Prov. 103,177 123,283 135,242 150,899 150,934 179,500 214,407 256,413

Total Liabilities 2,966,328 3,783,252 4,581,923 4,789,477 5,504,199 5,994,966 6,904,398 7,956,229 Current Assets 234,736 296,912 288,280 271,354 452,184 433,505 507,782 553,297

Investments 777,245 951,623 1,227,030 1,298,962 1,437,855 1,509,748 1,736,210 1,996,641 Change (%) 22.6 22.4 28.9 5.9 10.7 5.0 15.0 15.0

Loans 1,866,012 2,421,067 2,937,748 3,087,959 3,492,691 3,911,814 4,498,586 5,218,360 Change (%) 20.6 29.7 21.3 5.1 13.1 12.0 15.0 16.0

Fixed Assets 25,135 31,056 31,689 33,577 34,197 35,174 36,150 37,126 Other Assets 63,201 82,594 97,177 97,626 87,271 104,725 125,670 150,804

Total Assets 2,966,328 3,783,252 4,581,923 4,789,477 5,504,199 5,994,966 6,904,398 7,956,229

Asset Quality (%)

GNPA (INR m) 32,144 43,794 87,196 134,658 188,808 232,978 247,472 256,748 NNPA (INR m) 9,817 20,386 44,542 72,365 99,177 148,558 163,666 170,065 GNPA Ratio 1.18 0.96 1.43 4.27 5.27 5.83 5.40 4.84 NNPA Ratio 0.53 0.84 1.52 2.34 2.84 3.80 3.64 3.26 PCR (Excl Tech. write off) 69.5 53.4 48.9 46.3 47.5 36.2 33.9 33.8 PCR (Incl Tech. Write off) 81.2 73.2 62.7 58.8 59.1 54.8 57.5 61.0

E: MOSL Estimates

3 February 2015 12


Financials and valuations

Ratios

Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E

Spreads Analysis (%)

Avg. Yield-Earning Assets 8.7 8.8 9.5 9.6 9.0 8.7 8.7 8.5 Avg. Yield on loans 9.8 9.8 10.6 10.6 9.8 9.6 9.6 9.4 Avg. Yield on Investments 6.5 6.5 7.1 7.5 7.5 7.1 6.8 6.6 Avg. Cost-Int. Bear. Liab. 5.3 5.0 6.1 6.4 5.8 5.7 5.5 5.3 Avg. Cost of Deposits 5.2 4.9 6.2 6.6 6.0 5.8 5.5 5.2 Interest Spread 3.4 3.9 3.4 3.2 3.1 3.0 3.1 3.2 Net Interest Margin 3.4 3.9 3.5 3.4 3.3 3.2 3.3 3.4

Profitability Ratios (%)

RoE 26.6 24.5 21.1 16.5 10.2 10.3 12.6 15.0 RoA 1.4 1.3 1.2 1.0 0.6 0.6 0.8 0.9 Int. Expense/Int.Income 60.4 56.2 63.2 64.5 62.6 63.1 61.6 59.8

Fee Income/Net Income 17.9 16.7 17.9 16.1 16.0 16.0 15.9 15.7

Non Int. Inc./Net Income 29.9 23.4 23.9 22.1 22.1 24.4 23.9 22.8

Efficiency Ratios (%)

Cost/Income* 43.4 43.6 41.8 45.0 47.5 48.4 46.8 44.6

Empl. Cost/Op. Exps. 65.5 70.1 67.5 69.5 69.7 70.9 70.0 69.2

Busi. per Empl. (INR m) 70.3 86.9 98.9 108.5 114.1 124.1 136.2 152.3 NP per Empl. (INR lac) 6.9 7.8 7.9 7.5 5.1 5.5 7.1 9.3

* ex treasury

Asset-Liability Profile (%)

Loans/Deposit Ratio 74.8 77.4 77.4 78.9 77.4 77.7 77.1 77.1 CASA Ratio 40.8 38.5 35.3 39.2 38.3 37.1 36.8 36.4 Investment/Deposit Ratio 31.2 30.4 32.3 33.2 31.9 30.0 29.7 29.5 G-Sec/Investment Ratio 85.5 83.9 81.5 83.0 78.2 80.0 80.7 81.4 CAR 14.2 12.4 12.6 12.7 11.5 11.2 10.6 10.1 Tier 1 9.1 8.4 9.3 9.8 8.9 8.8 8.5 8.3

11.1 3.7 Valuation 21.3 13.4

Book Value (INR) 102.6 126.5 155.5 176.8 190.2 208.4 232.9 266.1 Change (%) 23.1 23.3 22.9 13.7 7.6 9.6 11.8 14.2 Price-BV (x) 1.1 1.0 0.9 0.8 0.8 0.7

Adjusted BV (INR) 98.2 117.5 137.1 148.2 151.9 151.0 169.7 200.4 Price-ABV (x) 1.3 1.2 1.2 1.2 1.0 0.9

EPS (INR) 24.8 28.0 28.8 26.9 18.5 20.6 27.8 37.5 Change (%) 26.4 13.0 2.9 -6.7 -31.3 11.4 35.0 35.3 Price-Earnings (x) 6.1 6.6 9.6 8.6 6.4 4.7

Dividend Per Share (INR) 4.4 4.4 4.4 5.4 2.0 2.1 2.8 3.8 Dividend Yield (%) 2.5 3.1 1.1 1.2 1.6 2.1

E: MOSL Estimates

3 February 2015 13


N O T E S

3 February 2015 14


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