Punjab National Bank. CMP: INR716 TP: INR950 Buy

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1 BSE SENSEX S&P CNX 16,839 5,100 Bloomberg PNB IN Equity Shares (m) Week Range (INR) 1,144/703 1,6,12 Rel.Perf.(%) -8/-24/-28 M.Cap. (INR b) M.Cap. (USD b) July QFY13 Results Update Sector: Financials Punjab National Bank CMP: INR716 TP: INR950 Buy Punjab National Bank's (PNB) 1QFY13 PAT grew 13% YoY to INR12.5b (v/s our estimate of INR11.4b), driven by healthy margin performance (+10bp QoQ to 3.6%) and higher than expected non-interest income growth (12% above estimates). Asset quality disappointed, with gross slippages remaining at elevated levels. Key highlights: PNB restructured loans of just INR12.4b (a positive surprise, considering peer performance) and outstanding standard restructured loans now stand at INR240.5b (8.2% of overall loans). Asset quality disappointed, with slippages remaining high at INR27.7b (annualized slippage ratio of 4.5%). However, healthy upgradations and recoveries of INR14.7b (v/s 4.7b in 4QFY12) led to containment of GNPAs. Employee expenses increased 41% QoQ led by change in actuarial valuations and wage hike related provision. Domestic loans grew 18% YoY but was flat QoQ. Overseas loans grew 19% QoQ and 81% YoY, but adjusting for currency depreciation, growth was 50% YoY. CASA ratio declined to 34.5% v/s 35.3% in FY12 Valuation and view: In the current macroeconomic environment, while slippages and restructuring may remain at an elevated level, higher upgradations and recoveries would be the key for asset quality. Despite factoring in higher credit costs, we expect RoA to remain healthy at ~1.1% and RoE at ~18% over FY13/14. Maintain Buy. Alpesh Mehta Sohail Halai Investors are advised to refer through disclosures made at the end of the Research Report.

2 Quarterly performance: Above estimates (INR m) Y/E March 1QFY13A 1QFY13E % Var. Comments Net Interest Income 36,951 36,025 3 Despite higher than expected stress on asset quality margin Change (Y-o-Y) improved 10bp QoQ - a +ve surprise Other Income 11,660 10, Strong treasury gains led to higher non-int. income Net Income 48,611 46,406 5 Operating Expenses 20,203 19,091 6 Higher AS-15 related provisions Operating Profit 28,409 27,315 4 % Change (Y-o-Y) Other Provisions 10,325 10,576-2 While slippages remain high; recoveries and upgradations improve significantly Profit before Tax 18,084 16,739 8 Tax Provisions 5,627 5,356 5 Net Profit 12,457 11,382 9 Better than est. NII and non-interest income led to higher than % Change (Y-o-Y) 13 3 expected PAT Source: Company/MOSL Slippages increase sharply to INR28b; however recoveries and up-gradation improve as well Gross slippages during the quarter remained at an elevated level of INR27.7b (annualized slippage ratio of 4.5%) v/s INR28.2b a year ago. Mgmt mentioned that slippages were broad based and is not concentrated in any specific segment. Recoveries and up-gradations improved as well to INR14.6b vs INR4.7b a quarter ago which helped bank to contain GNPA. As a consequence, net slippage ratio stood at 2.2% as against 3.9% a quarter ago and 1.1% a year ago. During the quarter, bank wrote off INR340m as compared to INR660m a quarter ago. Absolute GNPA increased 15% QoQ, whereas NNPA up 10% QoQ. In percentage terms, GNPA stood at 3.3% (+ 41bp QoQ) while NNPA was at 1.7% (+16bp QoQ). PCR (calc) improved marginally to 50.8% as compared to 48.9% whereas PCR including technical w/off remained stable at 62.8%. Net restructured loan addition of INR4.1b In 1QFY13, PNB restructured loans worth INR12.4b (40bp of loans). Adj for repayment / settlement and slip to NPAs, o/s restructured loans stood at INR240.5b (8.2% of overall loans). Ex state government entities, restructured loans are lower at 5% of loan book. As on June 2012, the bank had exposure of INR83b to SEB of which INR70b have already been restructured. Margins improve 10bp QoQ to 3.6% - a positive surprise NII for the quarter increased 19% YoY and 12% QoQ to INR37b led by 10bp (3.6%) improvement in margins. While yield on loans increased 12bp QoQ, yield on investments was up 28bp QoQ to 7.9% which aided margin expansion. Cost of funds increased 22bp QoQ. Management has reiterated its margin guidance of 3.5%+. We model in NIM decline of ~15bp for FY13 and stable margins for FY14 as against margin of 3.8% in FY July

3 Healthy YoY business growth; CASA ratio falls further to 35.2% Business growth remained healthy as global loans grew 21% YoY (flat QOQ) INR2.94t. Domestic loans grew 18 YoY, however declined marginally on a sequential basis. On a sequential basis, growth moderated across sector and segment. Overseas loans grew by 19% QoQ and 81% YoY (ex currency impact, growth is 50%). As a result, share of overseas loans in overall loans increased to 8.7% v/s 7.3% a quarter ago and 5.8% a year ago. CASA deposits grew 10% YoY, but was flat on a sequential basis. While SA deposits grew 2% QoQ and 13% YoY, CA deposit declined 3% YoY and 10% QoQ and led to overall moderation. As a consequence CASA ratio declined further to 35.2% as compared to 36.2% a quarter ago. Non-interest income 12% above estimates Non-interest income during the quarter grew 7.6% YoY within which fee income grew 9% YoY to INR 7.3b. On a YoY basis fee from remittance, ATM operations and third party distribution was strong. Whereas on a sequential basis processing fees nearly doubled to INR2.6b (+6% YoY) this is a seasonal phenomenon. Forex income growth was strong during the quarter +32% QoQ and 61% YoY. Profit on sale of investments stood at INR880m as compared to INR1.6b a quarter ago and INR480m a year ago. Recoveries from written off account stood at INR870m as compared to INR2.4b a quarter ago and 1.1b a year ago. Conference call highlights Considering macroeconomic environment, management plans to consolidate its balance sheet rather than grow aggressively. Have received the directive from finance ministry to bring down bulk deposits below 15% and plans to complete this by March This directive will help to bring down cost of deposits at the system level. NPA provisions: Regulatory provisions required are INR5b however, actual provisions are higher at INR9b due to onetime OTS scheme (INR740m), technical write offs (INR340m) and additional provisions of INR3b to maintain PCR. No concentration of slippages during the quarter from any specific sector. Top 7 accounts accounted for INR10b, next 50 accounts accounted for INR10b and rest came from less than INR50m accounts. Out of the total up-gradation of INR9b, top 5 accounts accounted for INR5b Largest exposure to accounts restructured during the quarter stood at INR3.8b. Total SEB exposure at INR83b out of which INR70b is restructured. Out of the total standard restructured loans of INR240b, INR22b accounted from Air India, INR70b from SEB and INR20b to facilities which are not restructured. Excluding this outstanding standard restructured loans stood at INR128b Higher AS - 15 related provisions on account of expected wage hike and quarterly estimates taken from actuaries. Valuation and view PNB surprised negatively on asset quality again as slippages remained at an elevated level despite no large chunky accounts falling into the NPA category. However improvement in up-gradation and recoveries during the quarter led to containment of GNPA. This strong performance on up-gradation was led by few 30 July

4 large accounts which may not be sustainable going forward. We expect slippage ratio and credit cost to be at 3.3% and 115bp in FY13 and 3% and 1% in FY14 as against 2.8% and 0.9% in FY12. Improvement in up-gradation and recoveries would be the key to asset quality performance. PNB's outstanding standard restructured loans (net of repayments and NPA) stood at INR240.5b which is 8.2% of outstanding loans. However, excluding state government entities restructured loan stood at INR148 (~5% of the loan book), marginally higher than peers. Despite higher slippages and increase in pressure on cost of funds, PNB reported 10bp QoQ improvement in margin to 3.6% - which was impressive. Management has reiterated its guidance on margins of 3.5%+. We model in NIM decline of ~15bp for FY13 and NII CAGR is expected to be ~16% over FY12/14E. Higher margins, healthy fee income growth will help PNB to absorb impact of asset quality shocks. Despite factoring in high credit costs, RoA to remain healthy at ~1.1% and RoE at 18%+ over FY13/14. We expect PNB to report earnings CAGR of ~14% over FY12-14E. BV is expected to be INR904/1,058 in FY13/14. The stock trades at 0.8x FY13E BV and 0.7x FY14E BV. Maintain Buy. We downgrade our est. for FY13/14E to factor in higher credit costs (INR b) Old Estimates Rev. Estimates Change (%) FY13 FY14 FY13 FY14 FY13 FY14 Net Interest Income Other Income Total Income Operating Expenses Operating Profits Provisions PBT Tax PAT Margins (%) Credit Cost (%) RoA (%) RoE (%) Source: MOSL Punjab National Bank: One year forward P/E Punjab National Bank: One year forward P/BV 30 July

5 Quaterly trends Loan growth remains healthy Deposit growth moderates Domestic loans grew 18 YoY, however declined marginally QoQ. Overseas loans grew by 19% QoQ and 81% YoY (ex currency impact, growth is 50%) CASA growth moderated further to ~10% YoY. Share of bulk deposits declined to 22% vs 24% a quarter ago CASA ratio (calc.) declines 80bp QoQ (%) CD ratio declines marginally QoQ (%) A 3% QoQ decline in CA deposits led to moderation in CASA deposits growth CD ratio remains at an elevated level YOL increases marginally QoQ Margins improve 10bp QoQ (%) YOL improved 12bp QoQ despite higher slippages and decline in lending rate (base rate) by 25bp Improved yields on loans and investments helped set off higher cost of funds leading to margin improvement 30 July

6 Quarterly trends (coninued) Slippages remain at elevated level Pace of recoveries and up gradations improves (INR b) Slippages remain at an elevated level, which is a cause of concern Significant improvement is witnessed in recoveries and upgradations led by upgradation in few large accounts Pace of addition to restructured loan decline Power and AI consist of ~40% of restructured loans During the quarter, PNB restructured loans of just INR12.4b (a +ve surprise considering the peers performance) Adjusting for restructuring of state government entities (INR70b SEB + INR20b Air India), o/s standard restructure loan was at ~5% overall loans Credit cost moderated QoQ (%) GNPAs continue to rise; PCR improves PNB provided INR9b towards NPA as against regulatory requirement of INR5b to maintain PCR Higher slippages is translating into sharp rise in GNPAs in absolute terms (up 100%+ YoY) 30 July

7 Quarterly Snapshot FY11 FY12 FY13 Variation (%) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q QoQ YoY Profit and Loss (INR m) Net Interest Income 25,983 29,767 32,033 30,290 31,153 34,526 35,366 33,100 36, Other Income 8,917 7,183 8,572 11,454 10,837 8,889 9,541 12,760 11, Trading profits 1, , Forex Income 1, ,250 1,090 1,310 1,330 1,540 1,600 2, Recoveries ,230 2,210 1, , Div. from Liquid MF ,200 1, N.A. -62 Core Fees 5,237 5,353 5,012 6,424 6,697 5,589 6,131 7,100 7, Total Income 34,901 36,950 40,605 41,744 41,990 43,414 44,907 45,859 48, Operating Expenses 13,919 15,949 17,106 16,668 17,250 18,137 18,143 16,498 20, Employee 9,952 11,131 12,235 11,293 12,126 12,404 12,636 10,068 14, Others 3,967 4,818 4,871 5,376 5,124 5,732 5,507 6,430 6, Operating Profits 20,982 21,001 23,499 25,075 24,739 25,278 26,764 29,362 28, Provisions 5,341 5,160 7,139 7,279 8,935 7,103 9,461 10,273 10, NPA provisions 5,480 3,590 5,550 5,420 5,660 3,190 5,790 9,390 9, Provisions on Invst ,340 1,610 1,430-2,020-1, Others ,149 1,639 1,935 2,303 2,241 2,903 2, PBT 15,640 15,841 16,360 17,796 15,804 18,175 17,303 19,089 18, Taxes 4,958 5,095 5,463 5,787 4,753 6,124 5,803 4,848 5, PAT 10,683 10,746 10,898 12,009 11,051 12,050 11,501 14,241 12, Ratios (%) Fees to Total Income Cost to Core Income Tax Rate CASA (Cal) Loan/Deposit CAR Tier I Margins - Quarterly (%) 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 5,020 5,000 5,017 5,161 5,286 5,315 5,393 5,670 5, ATM 3,715 4,000 4,400 5,050 5,375 5,619 5,793 6,007 6, For %age change QoQ and YoY is bp Source: Company/MOSL 30 July

8 Quarterly Snapshot FY11 FY12 FY13 Variation (%) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q QoQ YoY Balance Sheet Loans 1,969 2,088 2,213 2,421 2,429 2,490 2,626 2,938 2, Investments ,010 1,110 1,175 1,231 1, Deposits 2,553 2,734 2,889 3,129 3,241 3,418 3,565 3,796 3, Deposits Break Up Core Deposits 2,075 2,178 2,241 2,415 2,463 2,607 2,709 2,913 3, % to total Deposits Other Deposits % to total Deposits Deposits Break Up CASA Deposits 1,044 1,110 1,128 1,203 1,213 1,240 1,260 1,341 1, % to total Deposits Savings ,005 1,027 1,057 1, % to total Deposits Current % to total Deposits Term Deposits 1,510 1,624 1,761 1,926 2,028 2,178 2,306 2,455 2, % to total Deposits Loan Break Up Agriculture SME Loans Retail Loans Other loans 1,271 1,324 1,404 1,562 1,573 1,616 1,684 1,863 1, Asset Quality Movement of NPA -Quarterly Opening Additions Deductions Cash Recovery Upgradation NM 283 Write offs Closing Slippage Ratio (%) Credit cost (%) CAR Risk weighted Assets 1,990 2,161 2,284 2,488 2,463 2,503 2,503 2,919 2, Tier I Capital Tier II Capital For %age change QoQ and YoY is bp Source: Company/MOSL 30 July

9 Stock Info EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY FY year Sensex rebased Shareholding pattern (%) Jun-12 Mar-12 Jun-11 Promoter Domestic Inst Foreign Others July

10 Financials and Valuation 30 July

11 Financials and Valuation 30 July

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