Punjab National Bank ACCUMULATE. Performance Highlights. CMP `1,115 Target Price `1,259. 3QFY2011 Result Update Banking.

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1 3QFY2011 Result Update Banking January 21, 2011 Punjab National Bank Performance Highlights Particulars (` cr) 3QFY11 2QFY11 % chg (qoq) 3QFY10 % chg (yoy) NII 3,203 2, , Pre-prov. profit 2,350 2, , PAT 1,090 1, , For 3QFY2011, PNB posted moderate net profit growth of 1.4% qoq and 7.8% yoy to `1,090cr, in line with our estimates of `1,100cr. However, the bank reported higher provisioning expenses, over 30% above estimates, which were offset by higher non-interest income. We recommend Accumulate on the stock. Strong business growth but pressure on asset quality persists: During the quarter, advances grew by 6.0% qoq (29.8% yoy) to `221,252cr, while deposits grew by 5.7% qoq (23.5% yoy) to `288,873cr. Asset quality continued to be under pressure, with gross NPAs rising by 12.8% qoq and net NPAs increasing by 10.5% qoq. On a qoq basis, the annualised slippage ratio increased by 14bp to 2.1%. The CASA ratio dropped to 39.1% from 40.6% in 2QFY2011. Yield on funds increased by 10bp qoq to 8.25%, aided by the 100bp increase in base rate, which was higher-than-peer average of ~70bp, while the cost of funds increased by 15bp sequentially to 4.54%. Reported NIMs expanded by 7bp sequentially to 4.13%. Consequently, NII increased by 7.6% sequentially to `3,203cr (a healthy 37.5% increase yoy). The non-interest income increased by 17.4% yoy to `857cr, despite a 44.6% reduction in treasury gains. Operating expenses increased substantially by 7.3% qoq and 37.7% yoy, led by the 46.9% yoy increase in employee costs and 19.0% yoy increase in other operating expenses. Outlook and valuation: Post the recent correction in the stock, it is trading at 1.5x FY2012E ABV of `741 v/s its five-year range of x and median of 1.4x. We recommend an Accumulate rating on the stock with a Target Price of `1,259 (earlier `1,341), valuing it at a multiple at 1.7x FY2012E ABV ACCUMULATE CMP `1,115 Target Price `1,259 Investment Period Stock Info Sector 12 months Banking Market Cap (` cr) 35,156 Beta Week High / Low 1,395/842 Avg. Daily Volume 55,193 Face Value (`) 10 BSE Sensex 19,046 Nifty 5,722 Reuters Code PNBK.BO Bloomberg Code PNB@IN Shareholding Pattern (%) Promoters 57.8 MF / Banks / Indian Fls 17.7 FII / NRIs / OCBs 19.4 Indian Public / Others 5.1 Abs. (%) 3m 1yr 3yr Sensex (4.7) PNB (14.0) Key financials Y/E March (` cr) FY2009 FY2010 FY2011E FY2012E NII 7,031 8,523 12,081 13,401 % chg Net profit 3,091 3,905 4,320 4,712 % chg NIM (%) EPS (`) P/E (x) P/ABV (x) RoA (%) RoE (%) Vaibhav Agrawal Ext: 6808 vaibhav.agrawal@angelbroking.com Shrinivas Bhutda Ext: 6845 shrinivas.bhutda@angelbroking.com Varun Varma Ext: 6847 varun.varma@angelbroking.com Please refer to important disclosures at the end of this report 1

2 Exhibit 1: 3QFY2011 performance Particulars (` cr) 3QFY11 2QFY11 % chg (qoq) 3QFY10 % chg (yoy) Interest earned 7,119 6, , Interest expenses 3,916 3, , NII 3,203 2, , Non-interest income Operating income 4,061 3, , Operating expenses 1,711 1, , Pre-prov. profit 2,350 2, , Provisions & cont PBT 1,636 1, , Prov. for taxes PAT 1,090 1, , EPS (`) Cost-to-income ratio (%) Effective tax rate (%) Net NPA (%) Exhibit 2: 3QFY2011 Actual v/s Angel estimates Particulars (` cr) Actual Estimates Var. (%) NII 3,203 3, Non-interest income Operating income 4,061 3, Operating expenses 1,711 1, Pre-prov. profit 2,350 2, Provisions & cont PBT 1,636 1,679 (2.6) Prov. for taxes (5.7) PAT 1,090 1,100 (0.9) January 21,

3 Strong business growth During the quarter, advances grew sequentially by 6.0% (29.8% yoy) to `221,252cr, while deposits grew sequentially by 5.7% to `288,873cr (23.5% yoy). On a yoy basis, saving deposits increased by 23.7% to `89,860cr, while current deposits rose by 15.5% to `22,945cr. Overall CASA deposits increased to `112,806cr in 3QFY2011 from `92,492cr in 3QFY2010, recording growth of 22%. However, sequentially, CASA deposits only grew by 1.6% as compared to the 8.4% increase in term deposits. Consequently, the CASA ratio dropped to 39.1% from 40.6 in 2QFY2011. The bank saw robust 76.5% yoy growth in overseas gross advances to `10,817cr (4.8% of overall gross advances) from `6,973cr (3.7% of overall gross advances), partly due to concentrated efforts on overseas expansion and partly due to a small base effect. The bank increased its exposure to the infrastructure sector to `33,787cr (up 49.7% yoy and comprising 15.3% of overall advances) from `22,567cr (10.8% of overall advances) in 3QFY2010. Exhibit 3: MSME and agriculture witness strong traction Particulars (` cr) 3QFY11 2QFY11 % chg (qoq) 3QFY10 % chg (yoy) Agri 33,909 32, , Retail 21,730 22,596 (3.8) 17, MSME 25,249 23, ,674 (22.7) Medium & large corporates 76,545 72, , Comm. real estate 9,729 9,870 (1.4) 10,551 (7.8) Services & others 41,278 36, , Domestic non-food credit 208, , , Exhibit 4: Steady business growth Exhibit 5: Domestic non-food advances break-up Deposits (` cr) Deposits qoq growth (%, RHS) 350,000 Advances (` cr) Advances qoq growth (%, RHS) Services & Others 20% Agri 16% 300, , , Comm. Real Estate 5% Retail 10% 150, ,000 4QFY QFY10 2QFY10 3QFY QFY QFY11 2QFY11 3QFY Medium & Large Corporates 37% MSME 12% January 21,

4 Exhibit 6: Strong CASA ratio at 39.1% for 3QFY2011 (%) QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 NIMs high, but likely to come down going forward During the quarter, the yield on funds increased by 10bp sequentially to 8.25%, aided by the 100bp increase in base rate, which was higher-than-peer average of ~70bp, while the cost of funds increased by 15bp sequentially to 4.54%. Reported NIMs expanded by 7bp sequentially to 4.13%. Consequently, NII increased by 7.6% sequentially (a healthy 37.5% increase yoy) to `3,203cr. The bank has continuously maintained high reported NIMs at ~4% over the last year. However, going forward, with rising cost of funds, we expect calculated FY2012E NIMs to moderate by ~25bp to 3.5% from 3.8% in FY2011E. Exhibit 7: Trend in quarterly reported NIM (%) QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 January 21,

5 Healthy core non-interest income Non-interest income increased by 17.4% yoy to `857cr, despite a 44.6% reduction in treasury gains. Non-interest income, excluding treasury gains, gained healthy 34.4% yoy to `770cr. Recoveries from written-off accounts grew by strong 59.7% yoy to `123cr. Exhibit 8: Non-interest income break-up Particulars (` cr) 3QFY11 2QFY11 % chg (qoq) 3QFY10 % chg (yoy) Commission and brokerage (11.6) Treasury (44.6) Forex Recoveries Others Total Asset quality pressures persist PNB s gross NPAs increased, in absolute terms, by 12.8% qoq to `4,541cr and net NPAs rose by 10.5% qoq to `1,575cr. Gross slippages for the quarter stood at `977cr (`911cr in 2QFY2011), indicating an annualised slippage ratio of 2.1% (2.0% in 2QFY2011). Gross NPA ratio deteriorated to 2.0% (as against 1.9% in 2QFY2011). Net NPA ratio remained stable at 0.7%. The bank s provision coverage ratio including technical write-offs stood at 77.2% (77.1% in 2QFY2011). Exhibit 9: Trend in asset quality Gross NPAs (%) Net NPAs (%) Provision coverage (%, RHS) QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11, Note: NPA coverage excluding tech. write-offs till 4QFY2010 The bank made provisions of `555cr towards NPAs in 3QFY2011, compared to `359cr in 2QFY2011 and `329cr in 2QFY2010. Provision for investments stood at `44cr, compared to `65cr in 2QFY2011. January 21,

6 Exhibit 10: Break-up of provisions Particulars (` cr) 3QFY11 2QFY11 % chg (qoq) 3QFY10 % chg (yoy) NPA Standard assets (75) (208.0) Investments (32.3) Others (37.3) (14) - Total Operating costs rise due to employee benefit provisions Operating expenses increased by substantial 7.3% qoq and 37.7% yoy, driven by the 46.9% yoy increase in employee costs and 19.0% yoy increase in other operating expenses. The cost-to-income ratio stood at 42.1% (43.2% in 2QFY2011 and 40.6% in 3QFY2010). The increase in employee expenses was attributable to provisions (`360cr) made on account of gratuity (`125cr) and second pension option (`235cr) during the quarter. Management indicated that the total second option pension provision liability is expected to be ~`3,600cr as against earlier estimates of `2,500cr. We have accordingly raised our operating expense estimates for FY2012 from `7,014cr to `7,427cr. Exhibit 11: Trend in productivity Staff exps (` cr) Other opex (` cr) Cost-to-income ratio (%, RHS) 1,800 1,500 1, , , QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 Comfortable capital adequacy The bank s CAR stood at 11.9% at the end of 3QFY2011, with tier-i ratio of 7.6%. Including the nine-month profit till 3QFY2011, CAR stands at healthy 13.3% with tier-i of 9.0%. January 21,

7 Exhibit 12: Comfortable capital adequacy (%) 16.0 Tier-I CAR Tier-II CAR QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 Investment arguments Strong CASA legacy, but losing market share PNB has a structural advantage of having a high CASA ratio of 39.1%, which is driven by strong rural and semi-urban presence, especially in North India (total of 4,787 branches and 4,400 ATMs). This should act as a strong cushion in the current rising rate environment, and we have accordingly factored in a moderate ~25bp decline in calculated NIMs in FY2012E to 3.5% from 3.8% in FY2011E. That said, the bank is losing market share like most other PSBs on account of slow branch expansion and competition from private banks savings market share was down by 50bp to 7.1% during FY Higher slippages in 3QFY2011 On a qoq basis, the annualised slippage ratio increased by 14bp to 2.1%. Fresh additions stood at `977cr (higher by `66cr compared to 2QFY2011) and deductions stood at `460cr (lower by `39cr compared to 2QFY2011). Provisions for NPAs increased by 54.6% qoq to `555cr (`359cr in 2QFY2011) to compensate for high slippages witnessed in this quarter. Asset quality continued to be under pressure, with gross NPAs rising by 12.8% qoq and net NPAs increasing by 10.5% qoq. The provision coverage ratio including technical write-offs stood at 77.2% compared to 77.1% in 2QFY2011. Management is expecting better recoveries and upgradation in the coming quarters, which could curb the recent increase in slippages. In our view, the bank s strategy of high growth in advances at relatively high yields could contribute to relatively higher deterioration in asset quality and NIM compression going forward. January 21,

8 Outlook and valuation Post the recent correction in the stock, it is trading at 1.5x FY2012E ABV of `741 v/s its five-year range of x and median of 1.4x. We recommend an Accumulate rating on the stock with a Target Price of `1,259 (earlier `1,341), valuing it at a multiple at 1.7x FY2012E ABV Exhibit 13: Key assumptions Particulars (%) Earlier estimates Revised estimates FY2011E FY2012E FY2011E FY2012E Credit growth Deposit growth CASA ratio NIM Other income growth (13.4) 13.7 (9.3) 8.5 Growth in staff expenses Growth in other expenses Slippages Coverage ratio Treasury gain/(loss) (% of investments) Exhibit 14: Change in estimates Particulars (` cr) Earlier estimates FY2011 Revised estimates % chg Earlier estimates FY2012 Revised estimates % chg NII 11,781 12, ,214 13, Non-interest income 3,087 3, ,509 3,508 (0.0) Operating income 14,868 15, ,723 16, Operating expenses 6,099 6, ,014 7, Pre-prov. profit 8,769 8, ,709 9,482 (2.3) Provisions & cont. 2,167 2, ,346 2,343 (0.2) PBT 6,602 6,546 (0.9) 7,363 7,139 (3.0) Prov. for taxes 2,245 2,226 (0.9) 2,503 2,427 (3.0) PAT 4,358 4,320 (0.9) 4,860 4,712 (3.0) January 21,

9 Exhibit 15: P/ABV band Price (`) 0.25x 0.65x 1.05x 1.45x 1.85x May-02 Oct-02 Mar-03 Aug-03 Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Exhibit 16: Recommendation summary Company Reco. CMP (`) Tgt. price (`) Upside (%) FY2012E P/ABV (x) FY2012E Tgt. P/ABV (x) FY2012E P/E (x) FY10-12E EPS CAGR (%) FY2012E RoA (%) FY2012E RoE (%) AxisBk Buy 1,284 1, FedBk Buy HDFCBk Buy 2,099 2, ICICIBk* Buy 1,066 1, SIB Neutral YesBk Buy BOI Accumulate CorpBk Accumulate DenaBk Buy IndBk Buy IOB Buy J&KBk Buy 752 1, OBC Buy PNB Accumulate 1,115 1, SBI* Buy 2,598 3, UcoBk Neutral UnionBk Buy Source: Angel Research; Note: *Target multiples=sotp target price/abv (including subsidiaries) January 21,

10 Income statement Y/E March (` cr) FY06 FY07 FY08 FY09 FY10 FY11E FY12E NII 4,667 5,515 5,534 7,031 8,523 12,081 13,401 - YoY Growth (%) Other Income 1,521 1,730 1,998 2,920 3,565 3,233 3,508 - YoY Growth (%) (18.0) (9.3) 8.5 Operating Income 6,187 7,245 7,532 9,951 12,088 15,313 16,909 - YoY Growth (%) Operating Expenses 3,023 3,326 3,525 4,206 4,762 6,459 7,427 - YoY Growth (%) Pre - Provision Profit 3,164 3,919 4,006 5,744 7,326 8,855 9,482 - YoY Growth (%) Prov. & Cont. 1,130 1, ,424 2,309 2,343 - YoY Growth (%) (59.4) Profit Before Tax 2,034 2,168 3,296 4,763 5,903 6,546 7,139 - YoY Growth (%) (0.6) Prov. for Taxation ,247 1,673 1,997 2,226 2,427 - as a % of PBT PAT 1,439 1,540 2,049 3,091 3,905 4,320 4,712 - YoY Growth (%) Balance sheet Y/E March (` cr) FY06 FY07 FY08 FY09 FY10 FY11E FY12E Share Capital Reserves & Surplus 9,061 10,120 12,003 14,338 17,408 20,826 24,525 Deposits 119, , , , , , ,993 - Growth (%) Borrowings 6,687 1,949 5,447 4,374 8,572 10,372 12,239 Tier 2 Capital 1,935 3,695 6,165 8,085 10,690 13,149 15,516 Other Liab. & Prov. 7,584 6,484 8,633 10,045 10,318 12,574 14,944 Total Liabilities 145, , , , , , ,532 Cash Balances 23,395 12,372 15,258 17,058 18,328 21,118 26,699 Bank Balances 1,397 3,273 3,573 4,355 5,146 8,973 10,588 Investments 41,055 45,190 53,992 63,385 77,724 88, ,011 Advances 74,627 96, , , , , ,833 - Growth (%) Fixed Assets 1,030 1,010 2,316 2,397 2,513 2,950 3,377 Other Assets 3,763 3,981 4,381 5,020 6,320 7,647 9,024 Total Assets 145, , , , , , ,532 - Growth (%) January 21,

11 Ratio analysis Y/E March FY06 FY07 FY08 FY09 FY10 FY11E FY12E Profitability ratios (%) NIMs Cost to Income Ratio RoA RoE B/S ratios (%) CASA Ratio Credit/Deposit Ratio CAR Tier I Asset Quality (%) Gross NPAs Net NPAs Slippages Loan Loss Prov./Avg. Assets Provision Coverage Per Share Data (`) EPS ABVPS DPS Valuation Ratios PER (x) P/ABVPS (x) Dividend Yield DuPont Analysis (%) NII (-) Prov. Exp Adj. NII Treasury Int. Sens. Inc Other Inc Op. Inc Opex PBT Taxes RoA Leverage (x) RoE January 21,

12 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement Punjab National Bank 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%) January 21,