Punjab National Bank. CMP: INR133 TP: INR175 (+32%) Buy. PAT below est. led by higher write-offs; Growth remains moderate

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1 BSE SENSEX S&P CNX 26,265 7,954 Bloomberg PNB IN Equity Shares (m) 1,854.6 M.Cap. (INR b) / (USD b) 246.3/ Week Range (INR) 232/124 1, 6, 12 Rel. Per (%) 0/-6/-24 Avg Val INRm 970 Free float (%) 40.1 Financials & Valuation (INR b) Y/E MAR 2016E 2017E 2018E NII OP NP NIM (%) EPS (INR) EPS Gr. (%) BV/Sh. INR ABV/Sh. INR RoE (%) RoA (%) Payout (%) P/E(X) P/BV (X) November QFY16 Results Update Sector: Financials Punjab National Bank CMP: INR133 TP: INR175 (+32%) Buy PAT below est. led by higher write-offs; Growth remains moderate Punjab National Bank (PNB) reported PAT of INR6.2b (8% YoY, 36% below est.). While slippages declined QoQ (INR26.1b v/s INR33.8b), write-offs increased sharply (INR20b v/s INR13.2b) leading to higher credit costs (2.1% v/s 1.4% in 1Q). Core PPoP grew by 12% YoY albeit on a lower base. Gross slippages decreased to INR26.1b (annualized slippage ratio of 2.9%) from INR33.8b (3.9%) in 1Q. Relapse from restructured loans increased to INR14.8b 56% of slippages during the quarter. Upgrades and recoveries remained subdued at INR10.6b v/s INR23.6b in 1Q. Led by higher write-offs, GNPA declined 2% QoQ. NSL in absolute terms decreased 3% QoQ largely led by 4% decline in OSRL (10% of loans v/s 10.5% in 1Q). Overall NSL ratio decreased 50bp QoQ to 14%. Loan growth remained moderate (+7% YoY, flat QoQ) led by muted growth in MSME (flat YoY) and Services (-21% YoY). However, strong retail loan growth continues (23% YoY, +3% QoQ) now 15% of domestic loans v/s 13% in 2QFY15. Other highlights: (1) Fees growth remains muted (-4% YoY), (2) Domestic CD ratio decreased to 69.5% v/s 72% in 1QFY16, (3) Strong cost control continues (-3% YoY) led by lower AS-15 related provisions, (4) NIMs improved 7bp QoQ to 2.97% (led by lower stress additions), (5) Raised INR17.3b fresh equity capital from GOI in 2Q. Valuation and view: Stress additions moderated in 2QFY16; however, credit costs credit costs spiked led by higher write-offs. PNB remains highly levered to resolution of policy bottlenecks and improvement in economic growth. Lower interest income reversals on account of improvement in asset quality may lead to a positive surprise on the margins front. FY17 RoA/RoE is expected to be better than peers at 0.7%/10.8%. Valuations of 0.6x FY17E BV largely factor in the negatives. Maintain Buy. Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); Dhaval Gada (Dhaval.Gada@MotilalOswal.com); Investors are advised to refer through disclosures made at the end of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Exhibit 1: Quarterly Performance: Actual v/s estimates (INR m) Y/E MARCH 2QFY16A 2QFY16E Var. (%) Comments Net Interest Income 43,220 42,488 2 % Change (Y-o-Y) 4 2 NIM marginally higher than expectation Other Income 13,569 15, Fee income growth below expectation Net Income 56,789 57,658-2 Operating Expenses 27,404 29,059-6 Strong control over opex continues Operating Profit 29,385 28,599 3 % Change (Y-o-Y) 2-1 Other Provisions 18,821 14, Credit costs above expectation (2.1% v/s 1.4% in 1Q) Profit before Tax 10,564 14, Tax Provisions 4,354 4,760-9 Net Profit 6,210 9, PAT miss led by higher credit costs and muted core income % Change (Y-o-Y) growth Net stress loans stood at 14% (-50bp QoQ) Gross stress additions decreases 73% QoQ to INR40.6b six quarter low Gross slippages decreased QoQ to INR26.1b (annualized slippage ratio of 2.9%) from INR33.8b (3.9%) in 1QFY16. Upgrades and recoveries were at INR10.6b as compared to INR23.6b in 1Q. Net slippages for the quarter came in at INR15.5b (1.7%) v/s INR10.3b (1.2%) in 1Q. Write-offs increased to INR20b v/s INR13.2b in 1Q stock of technical writtenoff accounts stood at 3.8% of loans. GNPA in absolute terms declined 2% QoQ. In percentage terms GNPA and NNPA was at 6.36% (v/s 6.47% in 1Q) and 3.99% (v/s 4.05% in 1Q). Calculated PCR remained stable QoQ to 39% (61.4% - including technical write-off v/s 59.3% in 1Q). NSL in absolute terms decreased 3% QoQ largely led by 4% decline in OSRL (10% of loans v/s 10.5% in 1Q). Overall NSL ratio decreased 50bp QoQ to 14%. Iron and Steel, Infra (ex. power) and power sector contributes 14.5%, 8% and 39% of the overall restructured loans. Risk of relapse remain high unless resolution in this segments take place Other highlights CASA deposits grew by 11% YoY (-1% QoQ) led by strong in CA deposit growth (+18% YoY). SA deposits grew (+9% YoY, flat QoQ). Domestic CASA ratio stood at 38.9%. Retail advances grew 23% YoY (+3% QoQ) led by strong growth in housing (+5% QoQ and +28% YoY) and vehicles (+3% QoQ, +11% YoY). MSME segment was flat YoY (-1% QoQ) while agriculture loans grew 15% YoY +1% QoQ. 9 November

3 Buy with a target price of INR175 (0.7x FY17E BV). Valuation and view 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, ~60% 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. Lower interest income reversals on account of improvement in asset quality may be a positive surprise on margins front. FY17E ROA/ROE is expected to be better than peers at ~0.7%/11%. Although asset quality pressures would remain elevated in the near term (especially relapse from RL), we believe valuations of 0.6x FY17E BV largely factor in the negatives. Buy with a target price of INR175 (0.7x FY17E BV) based on residual income model. We assume 1% cost of equity (7.5% risk free rate, Beta of 1.2 and 5% market risk premium) and 5% terminal growth rate. Exhibit 2: We lower earnings estimate by 3-4% led by increase in effective tax rate INR B Old Est. Rev. Est. Chg. (%) FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 FY18 Net Interest Income Other Income Total Income Operating Expenses Operating Profits Provisions PBT Tax PAT Margins (%) Credit Cost (%) RoA (%) RoE (%) EPS BV ABV Exhibit 3: One year forward P/BV 2.0 PB (x) Peak(x) Avg(x) Min(x) Oct-05 Jan-07 Apr-08 Jul-09 Oct-10 Jan-12 Apr-13 Jul-14 Oct-15 Exhibit 4: One year forward P/E 12 PE (x) Peak(x) Avg(x) Min(x) Oct-05 Jan-07 Apr-08 Jul-09 Oct-10 Jan-12 Apr-13 Jul-14 Oct-15 9 November

4 Exhibit 5: DuPont Analysis: Highly levered to macro-economic conditions expect RoA to improve gradually (%) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Net Interest Income Fee income Fee to core income Core Operating Income Operating Expenses Cost to Core Income Ratio Employees Emp cost to Opex (%) Others Core operating Profits Trading and others Operating Profits Provisions NPA Othes PBT Tax Tax Rate RoA Leverage (x) RoE Exhibit 6: DuPont Analysis: Weak core operating performance and higher credit costs dent profitability (%) Y/E MARCH 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 Net Interest Income Fee income Fee to core income (%) Core Income Operating Expenses Cost to Core Income (%) Employee cost Emp. cost to Opex (%) Others Core Operating Profits Trading and others Operating Profits Provisions NPAs Others PBT Tax Tax Rate (%) RoA November

5 Story in charts Exhibit 7: Loan growth continues to remain subdued Loans (INR b) YoY Gr. (%) Exhibit 8: Deposit growth continues to remain ahead of loan growth; CD ratio decreases to 71% v/s 74% in 1QFY Deposits (INR b) YoY Growth (%) QFY12 1HFY12 9MFY12 FY12 1QFY13 1HFY13 9MFY13 FY13 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY15 1QFY16 1HFY16 2,429 2,490 2,626 2,938 2,945 2,947 2,973 3,088 3,051 3,139 3,261 3,493 3,475 3,571 3,625 3,805 3,809 3,810 1QFY12 1HFY12 9MFY12 FY12 1QFY13 1HFY13 9MFY13 FY13 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY15 1QFY16 1HFY16 3,241 3,418 3,565 3,796 3,854 4,007 3,858 3,916 3,968 4,057 4,206 4,514 4,449 4,735 4,841 5,014 5,177 5,399 Exhibit 9: Reported margins decline 20bp+ YoY led by 30bp+ decline in yield on funds (due to asset quality pressure) % Exhibit 10: GNPA in absolute terms declined 2% QoQ; Calculated PCR remained stable QoQ (%) GNPA (%) NNPA (%) PCR (cal %) QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 1QFY12 1HFY12 9MFY12 FY12 1QFY13 1HFY13 9MFY13 FY13 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY15 1QFY16 1HFY Exhibit 11: Net slippages increase QoQ Net Slippages (INR b) Net Slipapge Ratio (%) Exhibit 12: Credit costs spiked back to 2%+ levels (%) 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 9 November

6 Exhibit 13: Quarterly Snapshot FY14 FY15 FY16 Variation (%) INR m 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q QoQ YoY Profit and Loss Net Interest Income 39,075 40,155 42,211 40,018 43,797 41,512 42,331 37,916 41,025 43, Other Income 13,421 8,993 9,384 13,969 12,364 15,584 12,908 18,051 13,974 13, Trading profits 2, ,890 1,490 1,250 2,110 5,380 1,630 2, Recoveries , ,830 1,090 3,350 2,170 2, Div. from Liquid MF , , Core Fees 7,481 5,863 6,804 7,479 8,294 7,194 7,188 7,491 8,494 7, Total Income 52,496 49,149 51,596 53,987 56,161 57,096 55,239 55,967 54,998 56, Operating Expenses 22,758 23,800 24,572 22,253 24,908 28,335 27,732 23,940 23,677 27, Employee 16,159 16,587 17,580 14,778 17,674 20,341 20,286 15,069 15,496 18, Others 6,598 7,213 6,991 7,475 7,235 7,995 7,446 8,872 8,181 8, Operating Profits 29,738 25,348 27,024 31,734 31,253 28,760 27,507 32,027 31,321 29, Provisions 10,665 18,987 15,900 21,387 9,276 17,679 14,678 38,342 18,114 18, NPA provisions 6,750 10,050 10,830 17,550 13,660 16,380 17,230 32,810 12,910 20, Provisions on Invst ,430 2, , ,450 2,860 3, NM NM Others 2,995 4,507 2,880 3, ,559 1,898 2,672 1, NM NM PBT 19,073 6,361 11,123 10,347 21,977 11,081 12,830-6,315 13,207 10, Taxes 6,320 1,306 3,569 2,284 7,926 5,328 5,084-9,381 6,000 4, PAT 12,753 5,055 7,554 8,064 14,051 5,753 7,746 3,066 7,207 6, Ratios (%) Fees to Total Income Cost to Core Income Tax Rate CASA (Cal) Loan/Deposit Yield, cost movement (%) Yield on loans Yield On Investments Yield on Funds Cost of Deposits Cost of Funds Spreads Margins Margins - Cumulative (%) Yield on loans Yield On Investments Yield on Funds Cost of Deposits Cost of Funds Spreads Margins Franchise Branches 5,929 6,019 6,075 6,200 6,340 6,351 6,406 6,559 6,594 6,635 ATM 6,460 6,577 6,698 6,940 7,717 7,954 8,209 8,348 8,437 8,622 9 November

7 Exhibit 14: Quarterly Snapshot continued FY14 FY15 FY16 Variation (%) INR b 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q QoQ YoY Balance Sheet Loans 3,051 3,139 3,261 3,493 3,475 3,571 3,625 3,805 3,809 3, Investments 1,330 1,341 1,434 1,438 1,383 1,446 1,432 1,513 1,551 1, Assets 4,811 4,943 5,219 5,504 5,468 5,663 5,749 6,033 6,178 6, Deposits 3,968 4,057 4,206 4,514 4,449 4,735 4,841 5,014 5,177 5, Deposits Break Up CASA Deposits 1,499 1,564 1,610 1,729 1,636 1,716 1,731 1,838 1,815 1, % of total Deposits Savings 1,232 1,302 1,338 1,414 1,366 1,421 1,435 1,502 1,496 1, % of total Deposits Current % of total Deposits Term Deposits 2,469 2,493 2,597 2,785 2,813 3,019 3,110 3,176 3,362 3, % of total Deposits Loan Break Up Agriculture SME Loans Retail Loans Other loans 2,013 2,022 2,023 2,109 2,150 2,177 2,114 2,199 2,261 2, Investment book HTM ,070 1,021 1, AFS and HFT AFS (%) SLR (%) M. duration (Yrs) - Portfolio AFS Asset Quality Movement of NPA -Quarterly Opening Additions Deductions Cash Recovery Upgradation Write offs Closing Net Slippages Net Slippage Ratio (%) Credit cost (%) November

8 Exhibit 15: Financials - Valuation metrics 66Rating 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 HDFCB Buy 1, AXSB Buy KMB* Neutral YES Buy IIB Buy DCBB Sell FB Neutral JKBK Neutral SIB Buy Private Aggregate SBIN (cons)* Buy PNB Buy BOI Neutral BOB Buy CBK Buy UNBK Buy OBC Buy INBK Buy CRPBK Neutral ANDB Buy IDBI Neutral DBNK Neutral Public Aggregate HDFC* Under Review 1, LICHF Buy DEWH Buy IHFL Buy GRHF Buy REPCO Buy IDFC Buy RECL Buy POWF Buy SHTF Buy MMFS Buy BAF Buy 5, ,351 1, MUTH Buy NBFC Aggregate November

9 Financials and valuations Income Statement (INR Million) Y/E March E 2017E 2018E Interest Income 269, , , , , , , ,898 Interest Expense 151, , , , , , , ,843 Net Interest Income 118, , , , , , , ,055 Change (%) Non Interest Income 36,126 42,026 42,234 45,767 58,907 58,857 65,333 72,600 Net Income 154, , , , , , , ,655 Change (%) Operating Expenses 63,642 70,028 81,651 93, , , , ,855 Pre Provision Profits 90, , , , , , , ,800 Change (%) Provisions (excl tax) 24,920 35,772 43,856 66,939 79,975 64,430 73,619 80,089 PBT 65,637 70,370 65,218 46,905 39,573 57,971 72,756 89,711 Tax 21,302 21,528 17,741 13,479 8,957 23,188 24,737 30,502 Tax Rate (%) PAT 44,335 48,842 47,477 33,426 30,616 34,782 48,019 59,209 Change (%) Equity Dividend (Incl tax) 8,101 8,672 11,166 4,236 7,377 4,052 5,594 6,898 Core PPP* 82,432 97,584 99, ,201 99, , , ,653 Change (%) *Core PPP is (NII+Fee income-opex) Balance Sheet (INR Million) Y/E March E 2017E 2018E Share Capital 3,168 3,392 3,535 3,621 3,709 3,927 3,927 3,927 Equity Share Capital 3,168 3,392 3,535 3,621 3,709 3,927 3,927 3,927 Reserves & Surplus 211, , , , , , , ,079 Net Worth 215, , , , , , , ,006 Deposits 3,128,987 3,795,885 3,915,601 4,513,967 5,013,786 5,565,303 6,400,098 7,424,114 Change (%) of which CASA Dep 1,203,250 1,341,293 1,533,443 1,728,721 1,837,805 2,113,475 2,430,497 2,795,071 Change (%) Borrowings 315, , , , , , , ,812 Other Liabilities & Prov. 123, , , , , , , ,090 Total Liabilities 3,783,252 4,581,923 4,789,477 5,504,199 6,033,336 6,644,593 7,575,222 8,716,022 Current Assets 296, , , , , , , ,176 Investments 951,623 1,227,030 1,298,962 1,437,855 1,512,823 1,724,619 1,966,065 2,241,315 Change (%) Loans 2,421,067 2,937,748 3,087,959 3,492,691 3,805,344 4,261,985 4,901,283 5,685,488 Change (%) Fixed Assets 31,056 31,689 33,577 34,197 35,515 36,312 37,110 37,908 Other Assets 82,594 97,177 97,626 87, , , , ,135 Total Assets 3,783,252 4,581,923 4,789,477 5,504,199 6,033,336 6,644,593 7,575,222 8,716,022 Asset Quality (%) GNPA (INR m) 43,794 87, , , , , , ,032 NNPA (INR m) 20,386 44,542 72,365 99, , , , ,715 GNPA Ratio NNPA Ratio PCR (Excl Tech. write off) PCR (Incl Tech. Write off) E: MOSL Estimates 9 November

10 Financials and valuations Ratios Y/E March E 2017E 2018E Spreads Analysis (%) Avg. Yield-Earning Assets Avg. Yield on loans Avg. Yield on Investments Avg. Cost-Int. Bear. Liab Avg. Cost of Deposits Interest Spread Net Interest Margin Profitability Ratios (%) RoE RoA Int. Expense/Int.Income Fee Income/Net Income Non Int. Inc./Net Income Efficiency Ratios (%) Cost/Income* Empl. Cost/Op. Exps Busi. per Empl. (INR m) NP per Empl. (INR lac) * ex treasury Asset-Liability Profile (%) Loans/Deposit Ratio CASA Ratio Investment/Deposit Ratio G-Sec/Investment Ratio CAR Tier Valuation Book Value (INR) Change (%) Price-BV (x) Adjusted BV (INR) Price-ABV (x) EPS (INR) Change (%) Price-Earnings (x) Dividend Per Share (INR) Dividend Yield (%) E: MOSL Estimates 9 November

11 Corporate profile: Punjab National Bank 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 September 2015, it had loan book size of INR3.8t and deposits of INR5.4t. It has a wide distribution network having pan-india presence with a total of 6,635 branches and 8,622 ATMs. Government holds ~62% stake in the bank. Exhibit 16: Sensex rebased Exhibit 17: Shareholding pattern (%) Sep-15 Jun-15 Sep-14 Promoter DII FII Others Note: FII Includes depository receipts Exhibit 18: Top holders Holder Name % Holding LIC of India Fortune Plus Secured Fund 12.7 Lazard Asset Management LLC A/c Lazard Emerging 3.7 HDFC Trustee Company Ltd A/c HDFC Capital 2.5 ICICI Prudential CNX 100 ETF 1.1 Exhibit 19: Top management Name Designation Exhibit 20: Directors Name Name Gauri Shankar Executive Director Dilip Kumar Saha R S Sangapure K Veera Brahmaji Executive Director Rajinder Mohan Singh K Veera Brahmaji Dr. Ram S. Sangapure Executive Director Tara Chand Jhalani Rajesh Aggarwal D K Jain General Manager (Treasury) Gautam Premnath Khandelwal B P Kanungo Gauri Shankar *Independent Exhibit 21: Auditors Name CVK & Associates K N Gutgutia & Co G S Madhava Rao & Co Ramesh Kapoor & Co Borkar & Mazumdar Phillipos & Co Type Statutory Statutory Statutory Statutory Statutory Statutory Exhibit 22: MOSL forecast v/s consensus EPS (INR) MOSL forecast Consensus forecast Variation (%) FY FY FY November

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