Punjab National Bank Recovery efforts pay off PhillipCapital (India) Pvt. Ltd. BANKING: Quarterly Update 9 May 2013

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1 Punjab National Bank Recovery efforts pay off PhillipCapital (India) Pvt. Ltd. BANKING: Quarterly Update 9 May 2013 PNB s PAT was below estimate due to high credit cost & opex but GNPA remained stable driven largely by strong recoveries and up gradations. Despite high slippages coupled with large restructuring, stress asset level remained stable at 12% (loan book) driven by strong recoveries / upgradation and declassification of restructured asset due to satisfactory performance. Net interest income (NII) showed a growth of 14% YoY to Rs 37.8 bn on account of 5.2 % YoY credit growth and margin of 3.51% (flat YoY & 4bps QoQ improvement). Domestic credit showed moderation by growing 2.5% YoY. NIMs were marginally up sequentially due to increase in credit deposit ratio by 1.8% to 79%, whereas spreads declined sequentially. Yields on fund declined by 31 bps QoQ while cost of fund declined by 28 bps. Deposit witnessed mere 3.2% YoY growth as bank had shed bulk deposit taking the CASA ratio to 40.9% Vs 36.2% last year. Fee income remained subdued on account of the slow credit growth. Core operating profit (excluding treasury gains) also remained flat at Rs 28bn. Employee expenses increased by 41% YoY due to Rs2.5bn provision for wage revision. Operating expenses which showed rise of 27% YoY resulted a rise in C/I ratio to 44.8% from 37.3% last year. Provision and contingencies increased by 44% YoY on the back of high loan loss provisions; investment depreciation and standard asset provision. High restructuring and adverse movement of yield translated to high standard asset provision of Rs3.8bn and investment depreciation of Rs1.96bn. High loan loss provision of Rs8.3bn enabled the bank to improve PCR by 2.86% to 58.83% QoQ. GNPAs declined by 34 bps QoQ to 4.27% largely due to higher recoveries / upgradation & write offs. However, slippages continued to remain high at Rs 30 bn. The bank also restructured assets worth Rs64bn (which includes fresh disbursements to existing restructured DISCOMs). The outstanding standard restructured book increased to Rs 305bn (Rs285bn in Q3) and consequently stress asset component increased to 12.03% (NNPA + Restructured asset) of loan book (11.95% in Q3FY13). Outlook and valuation Going forward the management has guided for a margin compression of 15bps to 3.35% in FY14 (FY13 NIMs stands at 3.52%) in anticipation of possible cut in lending rates. Loan growth to remain ahead of industry average at ~17% YoY. The management s effort to expedite recovery has started delivering favorable results but the slippage does not seem to subside. Hence, the asset quality pressure to persist in short term. However, we believe the earnings growth to be strong enough to contain the asset quality pain in the book and generate a +1% return on asset going forward. At CMP of Rs783, the bank trades at 0.93x FY14e ABVPS of Rs841 & 0.8x FY15 ABVPS of Rs978. We maintain a rating on the stock with a PT of Rs980 (1x FY15 ABVPS) BUY PNB IN CMP RS 783 TARGET RS 980 (+25%) Company Data O/S SHARES (MN) : 353 MARKET CAP (RSBN) : 277 MARKET CAP (USDBN) : WK HI/LO (RS) : 920 / 659 LIQUIDITY 3M (USDMN) : 9.2 FACE VALUE (RS) : 10 Share Holding Pattern, % PROMOTERS : 56.1 FII / NRI : 18.0 FI / MF : 19.8 NON PROMOTER CORP. HOLDINGS : 1.8 PUBLIC & OTHERS : 4.3 Price Performance, % 1mth 3mth 1yr ABS REL TO BSE Price Vs. Sensex (Rebased values) Apr 10 Feb 11 Dec 11 Oct 12 PNB BSE Sensex Source: PhillipCapital India Research Other Key Ratios Rs mn FY13 FY14E FY15E Pre prov ROE (%) Pre prov ROA (%) Net Profit % growth EPS (Rs) Adj BVPS (Rs) ROE (%) P/E (x) Adj P/BV (x) Source: PhillipCapital India Research Est. Manish Agarwalla ( ) magarwalla@phillipcapital.in Sachit Motwani, FRM ( ) smotwani@phillipcapital.in

2 Result Update (Rs mn) Q4FY13 Q4FY12 YoY Gwth FY13 FY12 YoY Gwth Interest earned 103,788 96, , , Interest expended 66,001 63, , , Net interest income 37,787 33, , , Net interest margins Non interest income 11,740 12, ,159 42,026 Total Income 49,527 45, , , Total operating expenses 21,010 16, ,651 70, Payroll costs 14,213 10, ,747 47, Others 6,797 6, ,903 22, Pre provision Profit 28,517 29, , , Provisions & Contingencies ,856 35,773 % Operating income PBT 13,740 19, ,218 70, Provision for Taxes 2,432 4, ,741 21,528 % of PBT Net Profit 11,308 14, ,477 48, Equity 3,535 3, ,535 3,392 EPS, Rs Advances 3,087,252 2,937, Deposits 3,915,600 3,795, Advances / Deposits (%) Gross NPAs Gross NPAs (%) Net NPAs Net NPAs (%) CAR Total Source: Company, PhillipCapital India Research 2 of 6

3 FINANCIALS Income Statement Y/E Mar, Rs mn FY12 FY13 FY14E FY15E Interest on Loans 284, , , ,917 Interest on Investments 76,923 95, , ,207 Others 2,890 5,088 5,597 6,157 Total Interest Earned 364, , , ,280 Total Interest Expended 230, , , ,665 Net Interest Income 134, , , ,615 Total non interest income 42,026 42,159 46,942 46,482 Total Income 176, , , ,097 Personnel Expenses 47,235 56,747 65,259 75,048 Other Expenses 22,793 24,903 27,420 31,533 Total Op expenses 70,028 81,651 92, ,581 Net Inc (Loss) before prov 106, , , ,516 Provision for NPAs 24,920 35,773 43,856 36,707 Net Inc (Loss) before tax 70,370 65,218 73,672 89,401 Provision for Income Tax 21,528 17,741 22,102 26,820 Net Profit 48,842 47,477 51,571 62,580 Balance Sheet Y/E Mar, Rs mn FY12 FY13 FY14E FY15E Assets Cash & Bal with RBI 288, , , ,680 Loans, Adv & Int accrued 2,937,748 3,087,252 3,612,085 4,226,139 Investments 1,226,295 1,298,962 1,469,492 1,664,814 Fixed Assets (Net) 31,689 33,577 38,613 44,405 Other assets 97,929 97, , ,127 Total Assets 4,581,940 4,788,770 5,512,510 6,360,185 Liabilities Share capital 3,392 3,535 3,535 3,535 Reserves and Surplus 260, , , ,046 Revaluation Reserves 14,495 14,495 14,495 14,495 Hybrid Capital 25,205 30,205 35,205 40,205 Debt 111, , , ,698 Borrowing 235, , , ,959 Total Deposits 3,799,905 3,920,229 4,569,126 5,325,836 Other liab incld prov 131, , , ,411 Total Liabilities 4,581,935 4,793,398 5,512,510 6,360,185 Source: Company, PhillipCapital India Research Valuation Ratios FY12 FY13 FY14E FY15E Earnings and Valuation Ratios Pre provision Operating RoAE (%) RoAE (%) Pre provision Operating ROA (%) RoAB (%) EPS (Rs.) Dividend per share (Rs.) Book Value (Rs.) , ,191.2 Adj BV (Rs.) Revenue Analysis Interest income on IBA (%) Interest cost on IBL (%) NIM on IBA / AWF (%) Core fee Inc / AWF (%) Portfolio gains / Total Inc (%) Op.Exp / TI (%) Op.Exp / AWF (%) Employee exps / Op exps (%) Tax / Pre tax earnings (%) Asset Quality GNPAs / Gr Adv (%) NNPAs / Net Adv (%) Growth Ratio Loans (%) Investments (%) Deposits (%) Networth (%) Net Int Income (%) Non fund based income (%) 16.4 (3.3) Non Int Exp (%) Profit Before Tax (%) 7.2 (7.3) Net profit (%) 10.2 (2.8) Asset / Liability Profile Avg CASA/ Deposits (%) Avg Adv / Avg Dep (%) Avg Invst / Avg Dep (%) Incr Adv / Deposits (%) Avg Cash / Avg Dep (%) Capital Adequacy Ratio: Tier I (%) Internal Capital Generation rate (%) NNPAs to Equity (%) of 6

4 Recommendation Chart (TP 1500) (TP 1200) (TP 1100) 700 (TP 965) (TP 940) (TP 940) 500 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Source: PhillipCapital India Research 4 of 6

5 Management Vineet Bhatnagar (Managing Director) (91 22) Sajid Khalid (Head Institutional Equities) (91 22) Jignesh Shah (Head Equity Derivatives) (91 22) Research Automobiles, IT Services Deepak Jain (9122) Neha Garg (9122) Varun Vijayan (9122) Banking, NBFCs Manish Agarwalla (9122) Sachit Motwani, FRM (9122) Consumer, Media, Telecom Naveen Kulkarni, CFA, FRM (9122) Ennette Fernandes (9122) Vivekanand Subbaraman (9122) Cement Vaibhav Agarwal (9122) Sales & Distribution Kinshuk Tiwari (9122) Pawan Kakumanu (9122) Shubhangi Agrawal (9122) Dipesh Sohani (9122) Economics Anjali Verma (9122) Engineering, Capital Goods Ankur Sharma (9122) Jishar Thoombath (9122) Metals Dhawal Doshi (9122) Dharmesh Shah (9122) Infrastructure Vibhor Singhal (9122) Raheel Arathodi (9122) Oil&Gas, Fertiliser Gauri Anand (9122) Saurabh Rathi (9122) Sunil Kamath (Sales Trader) (9122) Rajesh Ashar (Sales Trader) (9122) Retail, Real Estate Abhishek Ranganathan, CFA (9122) Neha Garg (9122) Mid caps Kapil Bagaria (9122) Raheel Arathodi (9122) Technicals & Quant Neppolian Pillai (9122) Shikha Khurana (9122) Sr. Manager Equities Support Rosie Ferns (9122) Mayur Shah (Execution) (9122) Gurudatt Uchil (Execution) (9122) Contact Information (Regional Member Companies) SINGAPORE Phillip Securities Pte Ltd 250 North Bridge Road, #06 00 Raffles City Tower, Singapore Tel : (65) Fax: (65) JAPAN Phillip Securities Japan, Ltd 4 2 Nihonbashi Kabutocho, Chuo ku Tokyo Tel: (81) Fax: (81) THAILAND Phillip Securities (Thailand) Public Co. Ltd. 15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok Thailand Tel (66) Fax: (66) UNITED STATES Phillip Futures Inc. 141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building Chicago, IL USA Tel (1) Fax: (1) MALAYSIA Phillip Capital Management Sdn Bhd B 3 6 Block B Level 3, Megan Avenue II, No. 12, Jalan Yap Kwan Seng, Kuala Lumpur Tel (60) Fax (60) INDONESIA PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia Tel (62) Fax: (62) FRANCE King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance Paris France Tel (33) Fax : (33) AUSTRALIA PhillipCapital Australia Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia Tel: (61) Fax: (61) INDIA PhillipCapital (India) Private Limited No. 1, C Block, 2 nd Floor, Modern Center, Jacob Circle, K. K. Marg, Mahalaxmi Mumbai Tel: (9122) Fax: (9122) HONG KONG Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) Fax: (852) CHINA Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai Tel (86) Fax: (86) UNITED KINGDOM King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS Tel (44) Fax: (44) SRI LANKA Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka Tel: (94) Fax: (94) of 6

6 Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may or may not match or may be contrary at times with the views, estimates, rating, target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd. which is regulated by SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. 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Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst s personal views about all of the subject issuers and/or securities, that the analyst have no known conflict of interest and no part of the research analyst s compensation was, is or will be, directly or indirectly, related to the specific views or recommendations contained in this research report. The Research Analyst certifies that he /she or his / her family members does not own the stock(s) covered in this research report. Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it or its affiliates may hold either long or short positions in such securities. PhillipCapital (India) Pvt. Ltd does not hold more than 1% of the shares of the company(ies) covered in this report. Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic or political factors. Past performance is not necessarily indicative of future performance or results. Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material and are subject to change without notice.furthermore, PCIPL is under no obligation to update or keep the information current. Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorized use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety. Caution: Risk of loss in trading in can be substantial. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. PhillipCapital (India) Pvt. Ltd. 2nd Floor, C Block, Modern Centre, Mahalaxmi, Mumbai of 6