CMP* (Rs) 189 Upside/ (Downside) (%) (1) Bloomberg Ticker PNB IN Market Cap. (Rs bn) 402 Free Float (%) 38 Shares O/S (mn) 2,128

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1 2QFY18 Result Update November 8, 217 Market Cap. (Rs bn) 42 Free Float 38 Shares O/S (mn) 2,128 Credit Cost to Remain Elevated; Reiterate (PNB) has delivered a healthy performance in 2QFY18. Its PAT rose by 2% YoY and 63.2% QoQ to Rs5.6bn led by lower operating expenses (-1.6% YoY and -11% QoQ to Rs26.4bn) and lower provisioning expenses (-3.7% YoY & -6.4% QoQ to Rs24.4bn). Fresh slippages declined to Rs34.6bn in 2QFY18 vs. Rs66.5bn in 1QFY18 and Rs62bn in 2QFY17. However, operating income declined by 5.5% YoY and 4.3% QoQ due to lower core fee income (+2.7% YoY and -31% QoQ) and tepid growth in NII (+3.5% YoY and +4.2% QoQ). However, PNB s loan book grew by 2.6% QoQ owing to 4.9% QoQ growth in retail loan led by mortgage and auto segments. Management Commentary & Guidance PNB has total exposure of Rs11bn towards 9 loans out of 1st list of 12 loans referred to IBC by the RBI. The Bank needs additional provisioning of Rs8bn in next two quarters depending upon development on the resolution front. Further, the Bank has exposure of Rs65bn towards 2nd list referred to IBC, for which it holds ~37% provisioning. Deliberately lowering its international loan book due to lower profitability, the Bank focuses more on high-yielding retail and other small ticket loans. The Management expects its loan book to grow by 1-12% in FY18 led by Retail, mid-corporate and Agri segments. Though the Bank is yet to receive the RBI s final report on Annual Supervisory Assessment for FY17, the Management does not expect any major divergence. PNB expects NIMs to decline marginally in FY18 led by shifting of loan from base rate to MCLR. However, higher upgrades and recovery may help it to sustain NIMs at current level. Share price 1 mth 3 mth 12 mth Absolute performance Relative to Nifty Shareholding Pattern Jun 17 Sept'17 Promoter Mutual Funds Insurance Companies Foreign Portfolio Investors Others Total Year Stock Price Performance The Bank has taken necessary permission to raise Rs3bn in core equity and expects to complete the transaction by FY18-end. Further, it is planning to raise Rs1bn through monetisation of non-core assets and subsidiaries. Outlook & Valuation Though we believe PNB will be one of the major beneficiaries of recently announced mega PSB recapitalisation plan, we expect its credit cost to rise in the medium-term, which will adversely impact its earnings over next 2-3 quarters. Further, the Government of India is mulling consolidation of PSBs, which creates a very high level of uncertainty for the banks future earnings trajectory. We expect the Bank would continue to witness elevated level of credit cost, which will keep its earnings and return ratios subdued over next 3-6 quarters. Hence, we continue to maintain our recommendation on the stock with a revised SOTP-based Target Price of Rs187 (from Rs167 earlier) based on 1.2x FY19 Adj. BV implying standalone value at of Rs141 and valuing subsidiaries at Rs46 after 15% holding company discount) Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Note: * CMP as on Nov 8, 217 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Key Financials E FY19E NII 153, , ,633 18,547 PPP 113, , ,82 143,674 PAT (39,744) 13,248 16,6 32,277 EPS (Rs) (2.2) P/E (x) (9.3) Adj. BV (Rs) P/Adj. BV (x) Gross NPA Net NPA Avg. ROA (.6) Avg. ROE (1.4) Research Analyst : Asutosh Kumar Mishra Contact : (22) asutosh.mishra@relianceada.com 1

2 Risks to view Downside Risk: Any major slowdown in economy may adversely impact the Bank s asset quality. Upside Risks: Higher-than-expected business growth and accelerated resolution of the stressed assets. Exhibit 1: Income Statement Analysis 2Q FY18 2Q FY17 % yoy / bps 1Q FY18 % qoq / bps 1H FY18 1H FY17 % yoy / bps Interest on Advance 8,582 84,673 (4.8) 81,448 (1.1) 162,3 169,771 (4.6) YoA - Calculated (67) (65) Income on Investment 35,27 29, , ,36 56, Interest on Balances 6,225 2, , ,739 4, Others Interests 916 2,6 (54.3) ,282 2,448 (47.6) Interest Earned 122, ,34 121, , , Interest Expended 82,841 79, , , , CoF - Calculated (29) 4.7 (4) (27) Net Interest Income 4,152 38, , ,73 75, NIM - Calculated (18) (17) NIM - Reported (16) NA NA NA NII as % of Oper. Income Core Fee Income 9,24 9, ,4 (31.) 22,64 19, Fee Inc. as % of OI (65) Non Core Fee Income 9,82 14,879 (3) 9,918 (1.) 19,738 28,21 (3) Non core fee Inc. as % of OI (715) (29) Total Other Income 19,6 23,879 (2.2) 23,318 (18.3) 42,378 47,43 (1.7) Other Inc. as % of OI (591) 37.7 (55) (349) Operating Income (OI) 59,212 62,678 (5.5) 61,869 (4.3) 121,81 123,218 (1.7) Core Operating Income 49,392 47, ,951 (4.9) 11,343 95,9 6.7 Employees Expenses 15,9 19,672 (19.2) 19,373 (17.9) 35,273 38,67 (8.8) Employees Expn. as % of OI (453) 31.3 (446) (225) Other Operating Expenses 1,521 9, , ,845 18, Other Opert Exp. as % of OI Total Operating Expenses 26,421 29,557 (1.6) 29,696 (11.) 56,117 57,352 (2.2) Cost to income Ratio (254) 48. (338) (2) Operating Profit (OP) 32,791 33,12 (1.) 32, ,964 65,867 (1.4) Provisions and Conting. 24,48 25,338 (3.7) 26,87 (6.4) 5,495 52,721 (4.2) Pro Burden as % of OP (27) 81.1 (665) (231) Profit Before Tax 8,383 7, , ,469 13, Tax Expenses 2,777 2, , ,429 4, Eective Tax Rate (1,45) Net Profit 5,66 5,494 3, ,4 8, EPS (6.) (2.7) 2

3 Exhibit 2: Domestic NIMs improved by 8bps QoQ led by 9bps QoQ decline in cost of deposits Exhibit 3: NII growth remained muted owing to subdued growth in loan book 5, 4, 3, 2, 1, NII (LHS) NII as % of Avg. Assets Exhibit 4: Other income growth declined sequentially due to lower core fee income 4, 3, 2, 1, Exhibit 5: Overall operating profit growth remained subdued led by muted growth in operating income 8, 6, 4, 2, Other Income OI as % of Operating Income Operating Profit OP/ Avg. Assets Exhibit 6: Provisioning expenses declined sequentially due to moderation in fresh slippages Exhibit 7: PAT growth was led by lower provisioning and operating expenses 12, (49) 8 (93) (57) (12) 36 (15) , 6, 3, (2) (4) (1851) (5) (1) (15) (6) (2) Provision Expenses Provision as % of OP PAT (LHS) Growth YoY (RHS) 3

4 Exhibit 8: Balance Sheet Analysis (Rs bn) 2Q FY17 3Q FY17 4Q FY17 1Q FY18 2Q FY18 QoQ % / bps YTD % / bps YoY % / bps Net Worth Deposit 5,749 6,122 6,217 6,256 6, Savings Deposits 1,81 2,22 2,142 2,115 2, Current Deposits (2.4) (14.8) 8.3 CASA Deposit 2,162 2,628 2,6 2,516 2, (1.2) 18.8 Term Deposit 3,587 3,494 3,617 3,741 3, Investments 1,715 2,218 1,867 2,25 2, Advances 3,937 3,857 4,195 3,997 4, (2.2) 4.2 Total Business 11,41 12,197 12,279 12,279 12, Avg Int. Earning Assets 6,183 6,45 5,358 6,734 6, Risk Weighted Assets 4,392 4,44 4,556 4,547 4, CAR (8) (1) (9) Tier I Capital (6) (3) 1 Exhibit 9: Loan book growth was driven by Retail & Agriculture segments Exhibit 1: Deposit growth was led by retail term and saving deposits (Rs bn) (Rs bn) (2) (4) (5.).6 () (4.7) (4) (8) Incremental loan disbursement (LHS) Adv. Gr. qoq Incremental Deposit Mobilization (LHS) Deposit Gr. qoq (RHS) Exhibit 11: Loan Book Analysis 2Q FY17 3Q FY17 4Q FY17 1Q FY18 2Q FY18 QoQ % / bps YTD % / bps YoY % / bps Agriculture 635,11 617,9 669,31 656,11 675, SME/MSME 865,54 789,33 815,92 783,53 793,1 1.2 (2.8) (8.4) Large Industry 1,123,32 1,136,12 1,255,79 1,213,91 1,226,4 1. (2.4) 9.1 Retail 614,22 61,35 659,82 678,67 711, Others (Incl. NBFC) 37,65 49,8 516,66 481,7 53, (2.5) 35.8 Overseas 533,22 498,45 5,1 411,23 42, (15.9) (21.1) 4

5 Exhibit 12: Loan Book Analysis (% Break Up) 2Q FY17 3Q FY17 4Q FY17 1Q FY18 2Q FY18 QoQ % / bps YTD % / bps YoY % / bps Agriculture SME/MSME (23) (16) (258) Large Industry (42) (11) 12 Retail Others (Incl. NBFC) (7) 268 Overseas (2) (161) (316) Exhibit 13: CASA ratio improved sequentially to 44.4% in 2QFY18 Exhibit 14: GoI funding and utilisation of additional limit in AT-1 and Tier-II bonds will support PNB s growth plan (Rs bn) 4, 3, 2, 1, CASA Deposits (LHS) CASA Ratio (RHS) Total CAR Tier I Exhibit 15: Asset Quality Analysis 2Q FY17 3Q FY17 4Q FY17 1Q FY18 2Q FY18 QoQ % / bps YTD % / bps YoY % / bps Gross Non Performing Assets 564, , ,75 577,27 576,31 (.2) Fresh Slippages 62,2 56,6 68,96 66,49 34,6 (48.) (49.8) (44.2) Net Non Performing Assets 357, , ,21 345, ,72 () 5.7 (3.2) GNP Ratio (35) 11 (32) NNP Ratio (23) 64 (66) NPA Coverage Ratio (9) (93) 328 Restructured Gross Loans 18,94 172,16 119,32 11,51 14,56 (5.4) (12.4) (42.2) Restructured Loan as % of Adv (22) (3) (25) 5

6 Exhibit 16: Slippages declined sequentially during the quarter under review Exhibit 17: Lower fresh slippages along with higher write-o helped the Bank to contain GNPA growth 3 2 8, , , 2, Gross NPA (LHS) Gross NPA Ratio (RHS) Exhibit 18: PCR improved due to relatively higher provisioning during the quarter Exhibit 19: Lower GNP formation and higher provisioning expenses led to moderation in net NPA formation , 3, 2, 1, Net NPA (LHS) Net NPA Ratio (RHS) 6

7 Profit & Loss Statement Y/E March E FY19E Interest Earned 474, ,76 491, ,358 Interest Expenditure 321, , ,86 345,811 Net Interest Income 153, , ,633 18,547 Fee Income 27,874 32,279 36,52 4,133 Non Fee Income 32,127 57,235 39,244 46,52 Other Income 6,1 89,514 75,296 86,653 Net Operating Income 213, , , ,2 Core Operating Income 18, ,21 199,685 22,68 Employee Expenses 64,26 54,27 68,31 76,497 Other Expenses 35,465 39,587 43,545 47,29 Operating Expenses 99,725 93, , ,526 Operating Profit 113, , ,82 143,674 Provisions and Contingencies 17, ,536 12,564 95,499 Profit Before Tax (57,379) 2,115 24,519 48,175 Taxes (17,635) 6,867 8,459 15,898 Profit After Tax (39,744) 13,248 16,6 32,277 Balance Sheet Y/E March E FY19E Capital & Liabilities Capital 3,927 4,256 4,256 4,256 Reserves Total 379, , , ,874 Net Worth 383,11 418,47 43, ,13 Deposits 5,53,511 6,217,4 6,776,574 7,521,997 Current deposits 361,57 458, , ,452 Saving deposits 1,694,264 2,141,626 2,534,439 2,888,447 Term Deposits 3,474,678 3,616,882 3,794,881 4,137,98 Borrowings 597,552 47, , ,258 Other Liabilities & Provisions 162,74 16, , ,499 Total Liabilities 6,673,95 7,23,36 7,75,93 8,551,885 Assets Cash & Cash Equivalents 756, ,317 8,36 842,188 Investments 1,578,459 1,867,254 2,18,795 2,182,336 Advances 4,123,258 4,194,932 4,656,374 5,238,421 Fixed Assets 52,227 62,733 67,842 7,793 Other Assets 163, ,71 26, ,148 Total Assets 6,673,95 7,23,36 7,75,93 8,551,885 7

8 Per Share Data and Valuation Y/E March E FY19E No. of Shares (Mn) 1, ,128. 2,128. 2,128. Earnings Per Share (Rs.) (2.2) Book Value / Share (Rs.) ABV/Share (Rs.) Dividend Per Share (Rs.) Price/ Earnings (X) (9.4) Price/ BV (X) Price/Adjusted BV (X) Key Assumptions Y/E March E FY19E Loan Growth Deposit Growth RWA Growth Slippages Ratio Cost of Fund Yield on Fund NIM Other Income Growth (15.9) 15.1 Cost to Income Ratio Average Credit Cost Eective Tax Rate Growth Rate Y/E March E FY19E Net interest Income (7.5) (2.1) Other Income (15.9) 15.1 Operating Profit (5.1) 28.4 (12.7) 13.1 Provisions Expense (26.5) (18.3) (6.9) PAT (229.8) (133.3) Risk Weighted Assets Yields / Margins Y/E March E FY19E Cost of Funds (CoF) Yield on Advance Yield on funds Net Interest Margin (NIM)

9 Balance Sheet Ratio Y/E March E FY19E Credit / Deposit Ratio Incremental C/D Ratio Investment-Deposit Ratio CASA Ratio Asset Quality Y/E March E FY19E Gross NPA/Gross Advances Net NPA/Net Advances Provisioning Burden as % of PPP Provisioning Coverage Ratio Slippage ratio Provis. Exp. to Avg. Advance RoA Tree Analysis Y/E March E FY19E NII / Avg. Assets Core Fee / Avg. Assets Core Rev. / Avg. Assets Ope. Exp. / Avg. Assets Cost to Income Emp. cost / Avg. Assets Oprt. Exp. / Avg. Assets Core OP/ Avg. Assets Trading & Ot/ Avg. Assets OP/ Avg. Assets Provisions / Avg. Assets NPA prov. / Avg. Assets PBT / Avg. Assets (.9) Tax / Avg. Assets (.3) Eective Tax Rate RoA (.6) Leverage (x) RoE (1.4) Capital Adequacy Ratio Y/E March E FY19E Total CAR Tier

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