Punjab National Bank BUY. Performance Highlights. CMP `1,066 Target Price `1,326. 4QFY2011 Result Update Banking. Key financials

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1 4QFY2011 Result Update Banking May 5, 2011 Punjab National Bank Performance Highlights BUY CMP `1,066 Target Price `1,326 Particulars (` cr) 4QFY11 3QFY11 % chg (qoq) 4QFY10 % chg (yoy) Investment Period 12 Months NII 3,029 3,203 (5.4) 2, Preprov. profit 2,508 2, , PAT 1,201 1, , For 4QFY2011, PNB posted moderate net profit growth of 5.8% yoy to `1,201cr, in line with our estimates at the PBT level but slightly above expectation at the net profit level. However, NIM was below expectations, offset by higher treasury profits and a sharp pickup in recoveries from writtenoff accounts. We recommend Buy on the stock due to attractive valuations. Healthy business growth but pressure on NIM and asset quality: The bank continued to witness healthy business traction during 4QFY2011 as well. This strong growth led to credit market share gains for the bank of 11bp yoy during FY2011 to 5.44% and deposit market share gains of 6bp yoy to 5.29%. CASA deposits growth moderated to 18.1% yoy from 22.0% yoy growth in 3QFY2011. Reported CASA ratio declined by 50bp qoq and 160bp yoy to 39.2%. Due to the sharp rise in cost of funds (37bp qoq) and flat yield on advances, reported NIM dipped by 22bp qoq to 3.91%. Assetquality pressures continued to persist for the bank, with annualised slippage ratio rising to 2.7% from 2.1% in 3QFY2011. Even for FY2011 as a whole, slippage ratio of 2.3% was the highest in the past four years. Consequently, NPA provisions more than doubled to `2,004cr in FY2011 from `994cr in FY2010. However, due to substantial `1,000cr writeoffs in 4QFY2011, overall gross NPAs registered a sequential decline of 3.6%. Net NPAs rose substantially by 29.4% qoq due to lower provision coverage. Provision coverage ratio including technical writeoffs declined to 73.2% from 77.2% in 3QFY2011 and 81.2% in 4QFY2010. The bank took a hit of `1,131cr towards second pension option liability and `113cr towards gratuity in FY2011. Stock Info Sector Banking Market Cap (` cr) 35,437 Beta Week High / Low 1,395/933 Avg. Daily Volume 49,541 Face Value (`) 10 BSE Sensex 18,211 Nifty 5,460 Reuters Code PNBK.BO Bloomberg Code PNB@IN Shareholding Pattern (%) Promoters 58.0 MF / Banks / Indian Fls 17.5 FII / NRIs / OCBs 19.4 Indian Public / Others 5.2 Abs. (%) 3m 1yr 3yr Sensex PNB Outlook and valuation: Post the recent correction in the stock, it is trading at attractive valuations of 1.2x FY2013E ABV vs. its fiveyear range of x and median of 1.4x. Hence, we recommend Buy on the stock with a target price of `1,326, valuing it at a multiple at 1.5x FY2013E ABV. Key financials Y/E March (` cr) FY2010 FY2011 FY2012E FY2013E NII 8,523 11,807 13,149 14,883 % chg Net profit 3,905 4,434 4,826 5,517 % 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 Please refer to important disclosures at the end of this report 1

2 Exhibit 1: 4QFY2011 performance Particulars (` cr) 4QFY11 3QFY11 % chg (qoq) 4QFY10 % chg (yoy) Interest earned 7,440 7, , on Advances / Bills 5,904 5, , on investments 1,472 1,493 (1.3) 1, on balance with RBI & others (12.9) 31 (27.7) on others (62.8) Interest Expended 4,411 3, , Net Interest Income 3,029 3,203 (5.4) 2, Other income 1, Other income excl. treasury Fee Income Treasury Income incl. MF Div (7.9) Recov. from written off a/cs Others Operating income 4,174 4, , Operating expenses 1,667 1,711 (2.6) 1, Employee expenses 1,129 1,224 (7.7) Other Opex Preprovision Profit 2,508 2, , Provisions & Contingencies Provisions for NPAs (2.0) Other Provisions PBT 1,780 1, , Provision for Tax PAT 1,201 1, , Effective Tax Rate (%) (87)bp 33.6 (113)bp Exhibit 2: 4QFY2011 Actual vs. Angel estimates Particulars (` cr) Actual Estimates Var. (%) Net interest income 3,029 3,291 (8.0) Other income 1, Operating income 4,174 4,197 (0.5) Operating expenses 1,667 1,730 (3.6) Preprov. profit 2,508 2, Provisions & cont PBT 1,780 1,817 (2.1) Prov. for taxes (14.0) PAT 1,201 1, May 5,

3 Exhibit 3: 4QFY2011 performance analysis Particulars 4QFY11 3QFY11 % chg (qoq) 4QFY10 % chg (yoy) Advances (` cr) 242, , , Deposits (` cr) 312, , , CredittoDeposit Ratio (%) bp bp Current deposits (` cr) 26,838 22, , Saving deposits (` cr) 93,487 89, , CASA deposits (` cr) 120, , , Reported CASA ratio (%) (50)bp 40.8 (160)bp CAR (%) bp 14.2 (174)bp Tier 1 CAR (%) bp 9.2 (71)bp Profitability Ratios (%) Cost of deposits bp bp Yield on advances bp bp Yield on investments (40)bp 6.6 (18)bp Yield on funds bp bp Cost of funds bp bp Reported NIM (22)bp 4.0 (5)bp Costtoincome ratio (220)bp bp Asset quality Gross NPAs (` cr) 4,379 4,541 (3.6) 3, Gross NPAs (%) (24)bp 1.7 8bp Net NPAs (` cr) 2,039 1, Net NPAs (%) bp bp Provision Coverage Ratio (%) (397)bp 81.2 (796)bp Slippage ratio (%) bp bp Credit cost (%) (5)bp 0.6 (6)bp May 5,

4 Healthy business growth continues The bank continued to witness healthy business traction during 4QFY2011 as well. Advances growth at 9.4% qoq and 29.8% yoy was well above the industry s growth rate. Even deposits growth at 8.3% qoq and 25.5% yoy, was ahead of industry growth. This strong growth led to credit market share gains for the bank of 11bp yoy during FY2011 to 5.44% and deposit market share gains of 6bp yoy to 5.29%. Exhibit 4: Traction in business growth maintained Exhibit 5: CASA deposits growth moderates Adv. qoq chg (%) Dep. qoq chg (%) CDR (%, RHS) Calculated CASA ratio CASA yoy growth (%, RHS) The sequential traction in advances was driven by advances to corporates, which accounted for 52.7% of incremental credit during the quarter; and overseas advances, which grew by 19.4% qoq. Among industrial advances, there was strong growth momentum in infrastructure advances (up 45.2% yoy), of which the power segment grew by 64.4% yoy and 20.8% qoq and the telecom segment grew by 46.4% yoy. Out of the power sector exposure of ~`16,300cr as of FY2011, ~30% was towards exposure to state electricity boards and the remaining was towards private power players. Share of infrastructural loans to total domestic loans increased to 15.7% from 13.8% as of FY2010. Exhibit 6: MSME and agriculture witness strong traction Particulars (` cr) 4QFY11 3QFY11 % chg (qoq) 4QFY10 % chg (yoy) Agri 35,462 33, , Retail 23,621 21, , MSME 26,848 25, , Medium & Large Corporates 87,224 76, , Comm. Real Estate 9,731 9, ,382 (6.3) Services & Others 43,780 41, , Domestic nonfood credit 226, , , Food credit 4,421 4,485 (1.4) 3, Domestic credit 231, , , Overseas advances 12,912 10, , Global gross credit 243, , , May 5,

5 During 4QFY2011, CASA deposits growth moderated to 18.1% yoy from 22.0% yoy in 3QFY2011. Even on a sequential basis, though CASA deposits rose by healthy 6.7% qoq, growth was largely driven by the more volatile current account deposits (up 17.0% qoq). Saving account deposits grew by just 4.0% qoq. Consequently, the reported CASA ratio declined by 50bp qoq and 160bp yoy to 39.2% as of 4QFY2011. Due to moderation in CASA growth, incremental CASA ratio for the quarter dropped to 31.3%. The bank had to resort to bulk deposits to fund the healthy loan growth, as a result share of bulk deposits including CDs increased by 40bp qoq to 22.8%. The average maturity period of bulk deposits has been contained at 169 days to take benefit of repricing if interest rates move lower going forward. NIM declines due to higher cost of funds During the quarter, with the rising cost of funds for the system as a whole, the bank s cost of funds increased by 37bp qoq to 4.91% due to a 44bp qoq rise in cost of deposits to 5.64%. The bank could not pass on the entire additional interest burden (as evident from sequentially flat yield on advances) and a 40bp qoq decline in yield on investments (as the bank had put more funds into treasury bills for duration management). Consequently, reported NIM dipped by 22bp qoq to 3.91% from 4.13% in 3QFY2011. Consequently, NII growth came in below our expectations, declining by 5.4% qoq, but moderating on a yoy basis with 21.3% growth. The bank has continuously maintained high reported NIMs at ~4% over FY2011. However, going forward as witnessed in 4QFY2011, with rising cost of funds, we expect calculated FY2012E NIM to dip by 35bp to 3.3% from 3.6% in FY2011. Exhibit 7: Sharp uptick in cost of deposits... Exhibit 8:...leads to NIM compression of 22bp qoq (%) (%) Moderate fee income growth but recoveries show good traction Noninterest income registered healthy growth of 33.6% qoq and 22.6% yoy to `1,146cr, considerably above expectations. Recoveries from writtenoff accounts witnessed healthy pickup both on a sequential (up 79.7%) and yoy basis (up 57.9%) to `221cr. For FY2011 as a whole, recoveries from writtenoff accounts rose substantially by 61.4% to `510cr. For FY2012, management is confident of achieving even higher recoveries on the back of technically writtenoff account pool of `3,230cr. May 5,

6 Fee income growth was moderate at 14.6% yoy, despite strong 30% loan growth. In fact, processing fees during FY2011 grew by just 1.7% yoy; management is planning to focus on this aspect a bit more going forward. Exhibit 9: Treasury income trebles yoy; recoveries also pick up sharply Particulars (` cr) 4QFY11 3QFY11 % chg (qoq) 4QFY10 % chg (yoy) CEB Treasury incl. MF Dividend (7.9) Forex (12.8) 122 (10.7) Recoveries Others Other income 1, Other income excl. treasury Assetquality pressures persist Assetquality pressures refused to abate for the bank, as evident from the annualised slippages ratio rising to 2.7% from 2.1% in 3QFY2011. In fact, during the entire FY2011, the bank witnessed a slippage ratio of 2.3%, which was the highest in the past four years. Even credit costs continued to be relatively higher (60bp for 4QFY2011). There were no chunky accounts or sectoral concentration in slippages during 4QFY2011. The bank switched to systembased NPA recognition for accounts above `50lakhs during 4QFY2011. However, on account of substantial writeoffs of ~`1,000cr during 4QFY2011, gross NPAs declined by 3.6% qoq to `4,379cr, registering the first decline in the past six quarters. However, net NPAs rose substantially by 29.4% qoq to `2,039cr. Due to strong loan growth and higher writeoffs, gross NPA ratio improved to 1.8% from 2.0% in 3QFY2011. However, net NPA ratio deteriorated to 0.9% from 0.7% in 3QFY2011. Provision coverage ratio including technical writeoffs declined to 73.2% from 77.2% in 3QFY2011. Exhibit 10: Slippages continue to be high Slippages (%) Credit cost (%, RHS) Exhibit 11: PCR dips by 400bp sequentially Gross NPAs (%) Net NPAs (%) PCR (%, RHS) ; Note: PCR including tech. writeoffs During 4QFY2011, the bank restructured advances worth `924cr, higher compared to restructuring of `346cr in 2QFY2011 and `302cr in 1QFY2011, but in line with `719cr restructured in 3QFY2011. Cumulative restructured assets increased to `10,645cr (5.0% of advances and 61.6% of net worth) from May 5,

7 `10,348cr in 3QFY2011. There were relatively lower slippages of `97cr from domestic restructured advances in excess of `1cr from more than `300cr in 1HFY2011. Cumulative slippages from restructured advances increased to `2,021cr (19.0% of restructured advances) during the quarter. Operating costs rise yoy due to employee benefit provisions Operating expenses increased substantially by 51.5% yoy, primarily due to a 72.9% yoy increase in employee costs on the back of pension and gratuityrelated provisions. Consequently, the costtoincome ratio increased to 39.9% during 4QFY2011 from 32.0% in 4QFY2010. However, it declined by ~220bp qoq. During FY2011, the bank took a hit of `579cr towards second option pension liability for 4,627 retired employees. For serving employees, the liability towards second pension option crystalised at `2,758cr, of which the bank took a hit of 20% (`552cr) in the profit and loss account for FY2011. For the enhancement in gratuity limits from `3.5lakhs to `10lakhs, the additional liability has been pegged at `566cr, of which also the bank took a hit of 1/5 th (`113cr) in FY2011. Apart from these additional liabilities during FY2011, the bank made a provision of `318cr towards normal gratuity requirement and `264cr towards normal pension liability. Hence, in all, the bank provided `1,826cr during FY2011 `1,395cr towards pension liability and `431cr towards gratuity. As the bank was planning to charge off the gratuity liability in FY2011 itself, it was providing `125cr each quarter till 9MFY2011. However, during 4QFY2011, the bank decided to amortise the same over a fiveyear period and wrote back ~`262cr during 4QFY2011, which to an extent helped cushion the earnings from a hit of `579cr of pension liability for retired employees. Exhibit 12: Stable cost ratios Costtoincome ratio (%) Opex to average assets (%, RHS) Comfortable capital adequacy Post the recent capital infusion in the bank by the central government, government s shareholding in the bank has increased to 58%, which provides headroom of 7% for equity capital raising without any support from the government. The bank is not immediately looking to raise tieri capital. The bank s CAR stood at 12.4% at the end of 4QFY2011, with tieri ratio of 8.4%. May 5,

8 Investment arguments Strong CASA legacy, but losing market share PNB has a structural advantage of having a high CASA ratio of 39.2%, which is driven by strong rural and semiurban presence, especially in North India (total of 5,161 branches and 5,050 ATMs). This should act as a strong cushion in the current higher interest rate environment, and we have accordingly factored in a ~35bp decline in calculated NIMs in FY2012E to 3.3% from 3.6% in FY2011. 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 declined by 50bp to 7.1% during FY Investment concerns Persistent assetquality pressures During 4QFY2011, the annualised slippage ratio increased from already relatively high 2.1% in 3QFY2011 to 2.7%. Even during FY2011 as a whole, slippage ratio for the bank was the highest in the last four years. Provisions for NPAs more than doubled to `2,004cr (from `994cr in FY2010) to compensate for high slippages witnessed in FY2011. Provision coverage ratio including technical writeoffs declined to 73.2% from 77.2% in 3QFY2011 and 81.2% in 4QFY2010. 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. Outlook and valuation Post the recent correction in the stock, it is trading at attractive valuations of 1.2x FY2013E ABV vs. its fiveyear range of x and median of 1.4x. Hence, we recommend Buy on the stock with a target price of `1,326, valuing it at a multiple at 1.5x FY2013E ABV. May 5,

9 Exhibit 13: Key assumptions Particulars (%) Earlier estimates Revised estimates FY2012 FY2013 FY2012 FY2013 Credit growth Deposit growth CASA ratio NIMs Other income growth Growth in staff expenses Growth in other expenses Slippages Treasury gain/(loss) (% of investments) Source: Angel Research Exhibit 14: Change in estimates FY2012 Particulars (` cr) Earlier Revised Earlier Var. (%) estimates estimates estimates FY2013 Revised estimates Var. (%) NII 13,855 13,149 (5.1) 15,777 14,883 (5.7) Noninterest income 3,689 3, ,220 4, Operating income 17,544 17,046 (2.8) 19,997 19,318 (3.4) Operating expenses 7,327 6,650 (9.2) 8,353 7,647 (8.5) Preprov. profit 10,217 10, ,644 11, Provisions & cont. 2,775 3, ,041 3, PBT 7,442 7,144 (4.0) 8,603 8,166 (5.1) Prov. for taxes 2,414 2,318 (4.0) 2,791 2,649 (5.1) PAT 5,027 4,826 (4.0) 5,812 5,517 (5.1) Source: Angel Research Exhibit 15: P/ABV band 2,000 Price (`) 0.4x 0.8x 1.2x 1.6x 2x 1,600 1, May02 Feb03 Nov03 Aug04 May05 Feb06 Nov06 Aug07 May08 Feb09 Nov09 Aug10 May11 Feb12 May 5,

10 Exhibit 16: Recommendation summary Company Reco. CMP (`) Tgt. price (`) Upside (%) FY2013E P/ABV (x) FY2013E Tgt. P/ABV (x) FY2013E P/E (x) FY11E13E EPS CAGR (%) FY2013E RoA (%) FY2013E RoE (%) AxisBk Buy 1,209 1, FedBk Accumulate HDFCBk Buy 2,220 2, ICICIBk* Buy 1,028 1, SIB Accumulate YesBk Buy BOB Buy 848 1, BOI Buy CorpBk Buy DenaBk Buy IDBI# Neutral IndBk Buy IOB Accumulate J&KBk Accumulate OBC Buy PNB Buy 1,066 1, SBI* Buy 2,603 3, UcoBk Neutral UnionBk Buy Source: Angel Research; Note: *Target multiples=sotp target price/abv (including subsidiaries), #Without adjusting for SASF May 5,

11 Income statement Y/E March (` cr) FY08 FY09 FY10 FY11 FY12E FY13E Net Interest Income 5,534 7,031 8,523 11,807 13,149 14,883 YoY Growth (%) Other Income 1,998 2,920 3,565 3,613 3,898 4,435 YoY Growth (%) Operating Income 7,532 9,951 12,088 15,420 17,046 19,318 YoY Growth (%) Operating Expenses 3,525 4,206 4,762 6,364 6,650 7,647 YoY Growth (%) Pre Provision Profit 4,006 5,744 7,326 9,056 10,397 11,671 YoY Growth (%) Prov. & Cont ,424 2,492 3,252 3,505 YoY Growth (%) (59.4) Profit Before Tax 3,296 4,763 5,903 6,564 7,144 8,166 YoY Growth (%) Prov. for Taxation 1,247 1,673 1,997 2,130 2,318 2,649 as a % of PBT PAT 2,049 3,091 3,905 4,434 4,826 5,517 YoY Growth (%) Balance sheet Y/E March (` cr) FY08 FY09 FY10 FY11 FY12E FY13E Share Capital Reserve & Surplus 12,003 14,338 17,408 21,192 25,006 29,325 Deposits 166, , , , , ,819 Growth (%) Borrowings 5,447 4,374 8,572 17,720 21,187 25,212 Tier 2 Capital 6,165 8,085 10,690 13,870 16,367 19,313 Other Liab. & Prov. 8,633 10,045 10,318 12,328 13,995 17,309 Total Liabilities 199, , , , , ,296 Cash Balances 15,258 17,058 18,328 23,777 24,406 29,043 Bank Balances 3,573 4,355 5,146 5,914 11,309 13,457 Investments 53,992 63,385 77,724 95, , ,776 Advances 119, , , , , ,109 Growth (%) Fixed Assets 2,316 2,397 2,513 3,106 3,602 4,158 Other Assets 4,381 5,020 6,320 8,259 9,875 11,752 Total Assets 199, , , , , ,296 Growth (%) May 5,

12 Ratio analysis Y/E March FY08 FY09 FY10 FY11 FY12E FY13E 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 (75% cover.) 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 RoE May 5,

13 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%) May 5,