Punjab National Bank. CMP: INR768 TP: INR963 Buy

BSE SENSEX S&P CNX 16,480 4,975 Bloomberg PNB IN Equity Shares (m) 339.2 52-Week Range (INR) 1,200/751 1,6,12 Rel.Perf.(%) -12/-16/-18 M.Cap. (INR b) 260.5 M.Cap. (USD b) 4.8 10 May 2012 4QFY12 Results Update Sector: Financials Punjab National Bank CMP: INR768 TP: INR963 Buy Punjab National Bank s (PNB) 4QFY12 PAT grew 19% YoY and 24% QoQ to INR14.2b (18% above est) driven by 1) higher than expected treasury income and recoveries from written off accounts, 2) lower operating expenses and 3) lower tax outgo. However, steep sequential increase in slippages and restructured assets and sharp fall in NIMs by 40bp QoQ surprised negatively. In an uncertain environment strong loan growth (partially towards perceived riskier segment) is uncomforting. Key highlights: Net slippages during the quarter increased sharply to INR23.4b vs INR13.2b a quarter led by higher slippages in small value accounts. NPA provisions rose sharply by 62% QoQ to INR9.4b, leading to credit cost at ~135bp v/s 90bp in 3QFY12 and 94bp in 4QFY11. In 4QFY12, PNB restructured loans worth INR86b (290bp of o/s loans), of which some large accounts were to the tune of INR47b towards SEB restructuring and INR22b in the aviation sector. O/S standard restructured loans stood at INR231b (7.9% of overall loans). The bank provided INR1.55b towards NPV losses. Excluding SEB and Air India, standard restructured loans on balance sheet stands at INR150 (5.1% of loans). Operating expenses were flat YoY and down 9% QoQ. Change in actuarial valuations and reversal of higher provisions made during 9MFY12 led to decline in employee expenses, boosting operating profit. Valuation and view: In the current macro-economic environment, while slippages and restructuring may remain at an elevated level, higher up-gradations 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 ~20% levels over FY13/14, led by superior margins and fee income growth. Maintain Buy. Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com) + 91 22 3982 5415 Sohail Halai (Sohail.Halai@motilaloswal.com)+ 9122 3982 5430

Lower than estimated opex and lower tax outgo led to outperformance (INR m) Y/E March 4QFY12A 4QFY12E % Var. Comments Net Interest Income 33,100 35,926-8 Sharp margin contraction led by income reversals led to lower % Change (Y-o-Y) 9 19 than expected NII Other Income 12,760 11,519 11 Strong treasury gains led to higher non-int. income Net Income 45,859 47,445-3 Operating Expenses 16,498 20,725-20 Lower employee expenses led to lower opex Operating Profit 29,362 26,720 10 % Change (Y-o-Y) 17 7 Other Provisions 10,273 8,575 20 Higher slippages and NPV loss on restructured assets led to higher than expected provisions Profit before Tax 19,089 18,145 5 Tax Provisions 4,848 6,057-20 Net Profit 14,241 12,088 18 Higher treasury gains, lower opex and lower tax outgo % Change (Y-o-Y) 19 1 led to beat in bottomline Source: Company/MOSL Slippages increase sharply to INR28b; recoveries and upgradations improve QoQ Gross slippages during the quarter increased sharply to INR28.2b v/s INR16.8b in 3QFY12. Steep increase in slippages was largely seen across sectors and in our view it included one lumpy account (~INR2.2b) from the media sector. Recoveries and upgradations too increased to INR4.75b v/s INR3.6b during 3QFY12. The annualized slippage ratio for 4QFY12 increased steeply to 4.7% v/s 3.0% in 3QFY12 and 2.3% for FY11. NPA provisions rose sharply by 62% QoQ to INR9.4b. As a result, the credit cost increased sharply to ~135bp v/s 90bp in 3QFY12 and 94bp in 4QFY11. Absolute GNPA increased 35% QoQ, whereas NNPA up 54% QoQ. In percentage terms, GNPA stood at 2.9% (+ 51bp QoQ) while NNPA was at 1.5% (+41bp QoQ). PCR (calc) declined to 49% v/s 55% a quarter ago. PCR including technical write-offs was at 62.7% v/s 70% a quarter ago. Restructured INR86b (~290bp of overall loan book) during the quarter; ex large accounts, outstanding RL at 5.1% of loan book In 4QFY12, PNB restructured loans worth INR86b (290bp of o/s loans). Of these, some of the large accounts were INR47b towards SEB restructuring and INR22b in the aviation sector. Adjusted for repayment / settlement and NPAs from restructured loans, o/s standard restructured loans stood at INR231b (7.9% of overall loans). Excluding the large accounts, restructured loans are lower at 5.1% of loan book. During the quarter, the bank provided INR1.55b towards the NPV losses on the assets restructured during the quarter. As on March 2012, the bank has exposure to SEBs to the tune of INR72b and it has restructured all of its exposure to SEBs. Of the total, the bank restructured its exposure to Rajasthan and UP SEB during the quarter. Higher interest income reversals led to sharp 38bp margin decline to 3.5% NII for the quarter increased 9% YoY but declined 6% QoQ to INR33b as the margins declined sharply by 38bp QoQ to 3.5%. The contraction in margins could be partially attributed to interest income reversal of INR1.3b due to higher slippages during the quarter. While yield on loans contracted 57bp QoQ to 11.4%, cost of deposits increased 6bp QoQ to 6.8% predominantly leading to margin contraction. Yield on investments 10 May 2012 2

too declined 22bp QoQ to 7.64% (due to participation in OMO operation during the quarter), which also led to margin pressures. Management has reiterated its margin guidance of 3.5%+. We model in NIM decline of ~15bp for FY12 and NII CAGR is expected to be ~15% over FY12/14. Loan growth remains above industry; CASA ratio remains stable QoQ Business growth remained healthy as global loans grew 22% YoY and 12% QoQ to INR2.98t. Domestic loans grew 19% YoY and 12% QoQ with strong traction in agri (up 29% YoY and 20% QoQ), retail (up 24% YoY and 12% QoQ) and MSME (up 21% YoY and 8% QoQ). Overseas loans too grew strongly by 69% YoY and 10% QoQ. As a result, share of overseas loans in overall loans is up to 7.3% over 5.3% in FY11. Importantly, PNB continues to grow aggressively in some of the riskier segments such as infrastructure (up 29% YoY) and metals (up 35% YoY), which in the current environment is a cause of concern. Deposit growth remained above industry, up 21% YoY and 6% QOQ to INR3.78t. CASA ratio remained stable QoQ at ~36%. Strong growth in treasury income led to higher than expected non-interest income growth Non-interest income during the quarter grew strongly by 11% YoY and 34% QoQ driven by a steep 83% QoQ increase in profit on sale of investments. CEB income grew 11% YoY and 16% QoQ, while the forex income remained largely stable QoQ. Within core fee income strong growth was witnessed in income from remittances (up 89% YoY and 43% QoQ). Notably recoveries during the quarter increased sharply to INR2.4b v/ s INR920m in 3QFY12 and INR2.2b in 4QFY11. Valuation and view In FY12, PNB s core operating profits grew 18% YoY led by healthy business and fee income growth and stable CASA. 4QFY12 margins contracted sharply on the back of higher income reversals due to elevated level of slippages. 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 ~15% over FY12/14E. PNB surprised negatively on the asset quality front with steep increase in slippages despite no large chunky accounts falling into the NPA category during the quarter, which is a cause of concern. For full year FY12, the slippage ratio increased sharply to 2.78% v/s average slippage ratio of 2.0% for FY07-11. In the current macro-economic environment, while slippages may remain at an elevated level, higher upgradations and recoveries would be the key for asset quality. We model in slippage ratio of 2.4%/2.3% for FY13/14, and credit cost of 100/ 90bp. PNB s outstanding standard restructured loans (net of repayments and NPA) stood at INR231b which is 7.9% of outstanding loans. The significant jump in restructured assets during 4Q was mainly driven by one large account in aviation sector and SEBs. Excluding these two, standard restructured loans on the balance sheet stands at INR150 (5.1% of the loan book). Higher margins and healthy fee income growth has helped PNB to absorb the impact of asset quality shocks. Despite factoring in higher credit costs, we expect RoA to remain healthy at ~1.1% and RoE at ~20% levels over FY13/14. We expect PNB to report earnings CAGR of 15% over FY12-14E. BV is expected to be INR911/ 1,071 in FY13/14. The stock trades at 1x FY13E BV and 0.8x FY14E BV. Maintain Buy. 10 May 2012 3

We downgrade our estimates 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 153.6 176.8 153.3 179.3-0.2 1.4 Other Income 46.5 54.3 46.8 52.7 0.7-2.9 Total Income 200.1 231.1 200.1 232.0 0.0 0.4 Operating Expenses 82.5 91.2 82.2 92.6-0.2 1.6 Operating Profits 117.6 139.9 117.8 139.5 0.2-0.4 Provisions 34.5 37.5 38.3 43.9 10.9 17.0 PBT 83.1 102.5 79.5 95.6-4.3-6.7 Tax 27.4 33.8 25.4 30.6-7.2-9.5 PAT 55.7 68.7 54.1 65.0-2.9-5.3 Margins (%) 3.4 3.3 3.3 3.3 Credit Cost (%) 0.8 0.8 1.0 0.9 RoA (%) 1.1 1.2 1.1 1.1 RoE (%) 19.2 20.1 18.9 19.3 Source: MOSL Punjab National Bank: One year forward P/E Punjab National Bank: One year forward P/BV 10 May 2012 4

Quaterly trends Loan growth remains healthy So as deposit growth Agri (+20% QoQ), SME (+8% QoQ) and housing loans (+12% QoQ) were key drivers to loan growth. Within Industries strong growth witnessed from Power and Metals sectors CASA ratio (cal) stable QoQ (%) Core deposits grew 8% QoQ and 21% YoY. Share of bulk deposits declined by ~75bp QoQ to 23.3% CD ratio improves sharply QoQ (%) CASA deposits grew 11.5% YoY led by SA deposits growth of 13% YoY CD ratio increased 373bp QoQ to 77.4% Sharp decline in YOL led by higher int reversals NIM decline 40bp QoQ - a negative surprise (%) Interest reversal of INR1.3b coupled with reversal on AI restructuring led to sharp fall in YOL Sharp decline in NIM led to 8% lower than estimated NII growth 10 May 2012 5

Quarterly trends (coninued) Slippages rise sharply QoQ Pace of recoveries and upgradations improves Higher share of small value account slippages in overall slippages a cause for concern Recoveries and upgradations remains a key for asset quality O/S standard restructured loans increased sharply SEB and AI consist of ~36% of the restructured loans During the quarter, SEB exposure of INR47bp and Air India exposure of INR22b got restructured Excluding AI and SEB outstanding RL stands at 5.1% of the loan book Credit cost increases QoQ (%) GNPA and NNPA more than doubled YoY Increase in slippages led to higher credit cost Overall GNPA in absolute terms increased 35% QoQ, whereas NNPAs were up 54% QoQ 10 May 2012 6

Quarterly Snapshot FY11 FY12 Variation (%) Cumulative Numbers 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q QoQ YoY FY11 FY12 YoYGr (%) Profit and Loss (INR m) Net Interest Income 25,983 29,767 32,033 30,290 31,153 34,526 35,366 33,100-6 9 118,073 134,144 14 Other Income 8,917 7,183 8,572 11,454 10,837 8,889 9,541 12,760 34 11 36,126 42,026 16 Trading profits 1,210 380 910 530 480 770 870 1,590 83 N.A. 3,030 3,710 22 Forex Income 1,130 310 1,250 1,090 1,310 1,330 1,540 1,600 4 47 3,780 5,780 53 Recoveries 760 920 1,230 2,210 1,090 680 920 2,410 162 9 5,120 5,100 0 Div from Liquid MF 580 220 170 1,200 1,260 520 80 60-25 -95 2,170 1,920-12 Core Fees 5,237 5,353 5,012 6,424 6,697 5,589 6,131 7,100 16 11 22,026 25,516 16 Total Income 34,901 36,950 40,605 41,744 41,990 43,414 44,907 45,859 2 10 154,199 176,170 14 Operating Expenses 13,919 15,949 17,106 16,668 17,250 18,137 18,143 16,498-9 -1 63,642 70,028 10 Employee 9,952 11,131 12,235 11,293 12,126 12,404 12,636 10,068-20 -11 44,611 47,235 6 Others 3,967 4,818 4,871 5,376 5,124 5,732 5,507 6,430 17 20 19,031 22,793 20 Operating Profits 20,982 21,001 23,499 25,075 24,739 25,278 26,764 29,362 10 17 90,557 106,143 17 Provisions 5,341 5,160 7,139 7,279 8,935 7,103 9,461 10,273 9 41 24,920 35,773 44 NPA provisions 5,480 3,590 5,550 5,420 5,660 3,190 5,790 9,390 62 73 20,040 24,030 20 Provisions on Invst. 140 670 440 220 1,340 1,610 1,430-2,020 N.A. N.A. 1,470 2,360 61 Others -279 900 1,149 1,639 1,935 2,303 2,241 2,903 30 77 3,410 9,383 N.A. PBT 15,640 15,841 16,360 17,796 15,804 18,175 17,303 19,089 10 7 65,637 70,370 7 Taxes 4,958 5,095 5,463 5,787 4,753 6,124 5,803 4,848-16 -16 21,302 21,528 1 PAT 10,683 10,746 10,898 12,009 11,051 12,050 11,501 14,241 24 19 44,335 48,842 10 Ratios (%) Fees to Total Income 15.0 14.5 12.3 15.4 15.9 12.9 13.7 15.5 14.3 14.5 Cost to Core Income 44.6 45.4 46.2 45.4 45.6 45.2 43.7 41.0 45.4 43.9 Tax Rate 31.7 32.2 33.4 32.5 30.1 33.7 33.5 25.4 32.5 30.6 CASA (Cal) 40.9 40.6 39.1 38.5 37.4 36.3 35.3 35.3 Loan/Deposit 77.1 76.4 76.6 77.4 74.9 72.9 73.7 77.4 CAR 14.4 13.6 13.3 12.4 12.4 12.2 11.5 12.6 Tier I 9.3 9.0 9.0 8.4 8.5 8.4 7.9 9.3 Margins - Quarterly (%) Yield on loans 10.2 10.6 10.6 10.8 11.4 11.9 12.0 11.4-57 57 10.6 11.7 112 Yield On Investments 7.3 7.3 6.8 7.1 7.7 7.8 7.9 7.6-22 54 7.1 7.7 62 Yield on Funds 8.0 8.2 8.3 8.3 8.7 9.0 9.2 8.7-51 39 8.2 8.9 73 Cost of Deposits 5.0 5.0 5.2 5.6 6.3 6.5 6.7 6.8 6 116 5.2 6.6 138 Cost of Funds 4.5 4.4 4.5 4.9 5.4 5.5 5.8 5.7-5 80 4.6 5.6 104 Spreads 3.5 3.8 3.7 3.4 3.3 3.5 3.4 3.0-46 -41 3.6 3.3-31 Margins 3.9 4.1 4.1 3.9 3.8 4.0 3.9 3.5-38 -41 4.0 3.8-21 Margins - Cumulative (%) Yield on loans 10.2 10.4 10.5 10.6 11.4 11.7 11.8 11.7-10 109 Yield On Investments 7.3 7.3 6.6 7.1 7.7 7.7 7.7 7.6-17 52 Yield on Funds 8.0 7.9 8.1 8.1 8.7 8.9 8.9 8.9-5 77 Cost of Deposits 5.0 5.0 5.1 5.2 6.3 6.4 6.5 6.6 8 135 Cost of Funds 4.5 4.4 4.4 4.6 5.4 5.5 5.6 5.6 6 105 Spreads 3.5 3.6 3.6 3.6 3.3 3.4 3.4 3.3-11 -28 Margins 3.9 4.0 4.0 4.0 3.8 3.9 3.9 3.8-1 -12 Franchise Branches 5,020 5,000 5,017 5,161 5,286 5,315 5,393 5,670 277 509 ATM 3,715 4,000 4,400 5,050 5,375 5,619 5,793 6,007 214 957 For %age change QoQ and YoY is bp Source: Company/MOSL 10 May 2012 7

Quarterly Snapshot (INR b) FY11 FY12 Variation (%) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q QoQ YoY Balance Sheet Loans 1,969 2,088 2,213 2,421 2,429 2,490 2,626 2,938 12 21 Investments 810 866 884 955 1,010 1,110 1,175 1,231 5 29 Deposits 2,553 2,734 2,889 3,129 3,241 3,418 3,565 3,796 6 21 Deposits Break Up Core Deposits 2,075 2,178 2,241 2,415 2,463 2,607 2,709 2,913 8 21 % to total Deposits 81 80 78 77 76 76 76 77 75-44 Other Deposits 478 556 648 714 778 811 856 883 3 24 % to total Deposits 19 20 22 23 24 24 24 23-75 44 Deposits Break Up CASA Deposits 1,044 1,110 1,128 1,203 1,213 1,240 1,260 1,341 6 11 % to total Deposits 41 41 39 38 37 36 35 35 0-312 Savings 818 873 899 935 949 1,005 1,027 1,057 3 13 % to total Deposits 32 32 31 30 29 29 29 28-97 -204 Current 225 237 229 268 264 235 233 285 22 6 % to total Deposits 9 9 8 9 8 7 7 8 98-108 Term Deposits 1,510 1,624 1,761 1,926 2,028 2,178 2,306 2,455 6 27 % to total Deposits 59 59 61 62 63 64 65 65 0 312 Loan Break Up Agriculture 302 323 339 355 342 351 383 459 20 29 SME Loans 201 235 252 268 273 276 299 324 8 21 Retail Loans 194 206 217 236 242 247 260 292 12 24 Other loans 1,271 1,324 1,404 1,562 1,573 1,616 1,684 1,863 11 19 Asset Quality Movement of NPA -Quarterly Opening 32.1 36.1 40.2 45.4 43.8 48.9 51.5 64.4 Additions 12.2 9.1 9.8 12.5 11.8 9.9 16.8 28.2 67 126 Deductions 8.2 5.0 4.6 14.1 6.6 7.4 3.9 5.4 39-62 Cash Recovery 4.1 3.1 2.4 2.3 4.2 5.1 3.3 4.1 23 76 Upgradation 1.3 0.7 0.3 1.8 2.3 2.1 0.3 0.7 160-63 Write offs 2.8 1.3 1.9 10.0 0.1 0.2 0.3 0.7 113-93 Closing 36.1 40.2 45.4 43.8 48.9 51.5 64.4 87.2 Slippage Ratio (%) 3.1 2.2 2.3 2.7 2.4 1.9 3.0 4.7 161 198 Credit cost (%) 1.1 0.7 1.0 0.9 0.9 0.5 0.9 1.4 44 41 Source: Company/MOSL 10 May 2012 8

Stock Info EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY13 159.4 168.6-5.8 FY14 191.6 192.1-0.3 1-year Sensex rebased Shareholding pattern (%) Mar-12 Dec-11 Mar-11 Promoter 56.1 58.0 58.0 Domestic Inst 21.8 17.9 17.5 Foreign 17.4 18.6 19.4 Others 4.7 5.5 5.2 10 May 2012 9

Financials and Valuation 10 May 2012 10

Financials and Valuation 10 May 2012 11

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