Punjab National Bank

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Nov-14 Dec-14 Jan-15 Mar-15 Apr-15 May-15 Jul-15 Aug-15 Sep-15 Nov-15 India Research Banking November 09, 2015 QUARTERLY REVIEW Bloomberg: PNB IN Reuters: PNBK.BO SELL Asset quality improves but recovery a long way off PNB s results were below estimates as the earnings grew by 7.9% YoY (-13.8% QoQ) to Rs 6.2 bn led by weak NII growth (-6.3% YoY) and lower non- interest income. NIMs improved by 7 bps QoQ to 2.97%. The only silver lining in the result came in asset quality which improved marginally. GNPA and NNPA declined to 6.36% and 3.99% vs 6.47% and 4.05% respectively in. We have downgraded our advances growth estimate for FY16 and FY17. We maintain our Sell rating with a revised target price of Rs 127 (0.9x FY17E ABV). Weak NII growth: NII reported 4.1% YoY growth (5.4% QoQ) led by slower advances growth but NIMs improved marginally. NIM improved to 2.97% vs 2.9% in led by 20 bps QoQ growth in YoA to 9.76%. Advances growth remains weak: Advances grew by 6.7% YoY (flat QoQ) led by 3.8% and 3.1% sequential growth in corporate and retail advances. SME advances declined by 1.2% QoQ (flat YoY). We have downgraded advances growth estimate and expect advances to report a CAGR growth of 10.5% over FY15-17E. Asset quality improves marginally: Asset quality reported 2 nd quarter of marginal improvement as GNPA and NNPA declined to 6.36% and 3.99% vs 6.47% and 4.05% respectively. PCR also improved marginally to 61.4% vs 59.3% QoQ. Valuation & Outlook: Elevated GNPA & restructured book and lower return ratios continue to haunt the balance sheet of PNB. Though the restructuring pipeline is almost over, we expect incremental pressure from slippages from restructured book. We expect advances growth to remain weak in FY16 and expect asset quality issues will recede marginally. We expect the earnings of the bank to grow at 4.7% CAGR over FY15-17E led by 10.5% CAGR growth in advances. We maintain our Sell rating with a revised target price of Rs 127 (0.9x FY17E ABV). Key Financials Particulars FY13 FY14 FY15 FY16E FY17E Recommendation CMP: Target Price: Previous Target Price: Rs133 Rs127 Rs131 Downside (%) 5% Stock Information Market Cap. (Rs bn / US$ mn) 261/3,967 52-week High/Low (Rs) 232/124 3m ADV (Rs mn /US$ mn) 689/10.5 Beta 1.4 Sensex/ Nifty 26,265/7,954 Share outstanding (mn) 1,964 Stock Performance (%) 1M 3M 12M YTD Absolute (2.9) (17.9) (30) (39.3) Rel. to Sensex (0.4) (11.6) (25.6) (36.5) Performance 31,500 27,500 23,500 19,500 15,500 Source: Bloomberg Sensex (LHS) Earning Revision (%) FY16E FY17E NII 0.4 1.7 PAT 9.0 16.1 EPS 8.8 16.2 PNB (RHS) 250 200 150 100 50 0 Net interest income (Rs bn) 149 161 166 173 194 Net profit (Rs bn) 48 33 31 29 34 EPS (Rs) 26.9 18.5 16.51 15.51 18.10 PE (x) 4.9 7.2 8.06 8.58 7.35 P/ABV (x) 1.0 1.0 1.11 1.04 0.94 RoE (%) 15.7 9.7 8.2 7.1 7.8 RoA (%) 1.0 0.6 0.51 0.43 0.45 Analysts Contact Ankit Ladhani +91 22 6184 4329 ankit.ladhani@karvy.com

Exhibit 1: Quarterly results Particulars (Rs bn) % YoY %QoQ Interest Earned 123.5 114.6 7.7% 120.3 2.6% Interest Expense 80.2 73.1 9.7% 79.3 1.1% Net Interest income 43.2 41.5 4.1% 41.0 5.4% Other Income 13.6 15.6-12.9% 14.0-2.9% Net Operating Income (NOI) 56.8 57.1-0.5% 55.0 3.3% Operating Expenses 27.4 28.3-3.3% 23.7 15.7% - Employee cost 18.8 20.3-7.7% 15.5 21.2% - Other Costs 8.6 8.0 7.9% 8.2 5.5% Operating Profit 29.4 28.8 2.2% 31.3-6.2% Prov for Contingencies 18.8 17.7 6.5% 18.1 3.9% PBT 10.6 11.1-4.7% 13.2-20.0% Tax 4.4 5.3-18.3% 6.0-27.4% PAT 6.2 5.8 7.9% 7.2-13.8% Exhibit 2: Key highlights Particulars % YoY %QoQ Gross NPA (%) 6.36% 5.65% +71 bps 6.47% -11 bps Net NPA (%) 3.99% 3.26% +73 bps 4.05% -6 bps Advances (Rs. Bn.) 3,809.6 3,570.9 6.7% 3,808.8 0.0% Deposits (Rs. Bn.) 5,399.2 4,735.1 14.0% 5,177.3 4.3% Exhibit 3: Actual vs Expected performance Particulars (Rs bn) % YoY E Variance % Net Interest Income 43.2 41.5 4.1% 41.5 4.2% Pre Provisioning Income 29.4 28.8 2.2% 32.6-9.9% Net Profit 6.2 5.8 7.9% 9.8-36.8% Exhibit 4: Change in estimates Particulars FY2016E FY2017E Old New % Change Old New % Change NII (Rs mn) 176.7 173.0 (2.1) 203.9 194 (4.9) PAT (Rs mn) 31.4 28.8 (8.4) 39.7 34 (15.4) Advances Growth (%) 11.0 9.0 (18.2) 13.0 12.0 (7.7) Deposits Growth (%) 10.5 10.5-12.5 12.5 - NIM (%) 3.0 2.9 (2.7) 3.1 2.9 (5.0) ABV (Rs) 129.1 127.9 (1.0) 145.3 141.5 (2.6) EPS (Rs) 17.0 15.5 (8.8) 21.4 18.1 (15.4) 2

Weak advances growth continues Advances growth continued to remain weak (6.7% YoY and flat QoQ). Retail advances grew by 23% YoY (3.1% QoQ) whereas corporate advances grew by 18.5% YoY (3.8% QoQ). SME advances declined by 1.2% QoQ (flat YoY) whereas overseas advances grew by 9.5% YoY (flat QoQ). We have downgraded advances growth estimate and expect advances to report a CAGR growth of 10.5% over FY15-17E. NIMs and CASA improve marginally Deposits growth was higher than advances growth at 14% YoY (4.3% QoQ) led by 14.4% YoY (2.7% QoQ) growth in term deposits. CASA ratio improved to 36% from 35.1% in the previous quarter. CA deposits grew by 15.4% QoQ (25% YoY) whereas SA deposits grew by 11% YoY (5.4% QoQ). NIM improved to 2.97% vs 2.9% in led by 20 bps QoQ growth in YoA to 9.76% whereas CoD remained stable at 5.95%. Weak non interest income Led by lower fee income growth (4.6% YoY and 16.9% QoQ decline) led to lower non-interest income whereas treasury income grew by 73.6% YoY and 33.1% QoQ. Cost to income ratio deteriorates Led by sharp QoQ increase employee expenses (21.2% QoQ), operating expenses increased by 15.7% QoQ (-3.3% YoY). Cost to income ratio deteriorated to 48% vs 43% in (49.6% in ). Bank has opened 41 branches during the year. Asset quality improves marginally In absolute basis, GNPA and NNPA declined by 1.8% and 1.3% QoQ. GNPA and NNPA declined to 6.36% and 3.99% vs 6.47% and 4.05% respectively. Fresh slippages were lower at Rs 26.1 bn. whereas the total restructured book stood at Rs 382 bn (10% of total advances). Though the bank has reported 2 nd quarter of marginal improvement in asset quality we expect the recovery to be slower and any meaningful improvement only in FY17. Outlook PNB reported a weak set of earnings in the core business though marginal improvement in asset quality was a silver lining. Elevated GNPA and restructured book and lower return ratios continue to haunt the balance sheet of the bank. We expect incremental pressure on slippages from restructured book to impact asset quality going ahead. We expect the earnings of the bank to grow at 4.7% CAGR over FY15-17E led by 10.5% CAGR growth in advances. We have downgraded our advances growth estimate for FY16 and FY17. We maintain our Sell rating with a revised target price of Rs 127 (0.9x FY17E ABV). 3

November 09, 2015 Exhibit 5: Advances Growth (Rs bn) Exhibit 6: Deposits Growth (Rs bn) 4500 4000 3500 3000 2500 2000 1500 1000 500 0 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% 6,000.0 5,000.0 4,000.0 3,000.0 2,000.0 1,000.0-8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Advances Growth Deposits Growth Exhibit 7: Trend in CASA CASA 40.0% 39.0% 38.0% 37.0% 36.0% 35.0% 34.0% 33.0% 32.0% Exhibit 8: Trend in NIM NIM 3.65% 3.55% 3.45% 3.35% 3.25% 3.15% 3.05% 2.95% 2.85% 2.75% Exhibit 9: Trend in Asset Quality Exhibit 10: Trend in Cost-Income ratio 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 55.0% 50.0% 45.0% 40.0% 35.0% Cost- Income 30.0% Gross NPA Net NPA 4

Exhibit 11: Profit & Loss Statement Y/E Mar (Rs mn) FY13 FY14 FY15 FY16E FY17E Interest income 419 432 463 502 560 Interest Expenses 270 271 298 330 366 Net interest income 149 161 166 173 194 Non-interest income 42 46 59 63 69 Fee Income 23 26 27 30 33 Net total income 191 207 224 236 263 Operating expenses 82 93 105 117 131 Employee Expenses 57 65 73 82 92 Pre-provisioning profit (PPP) 109 114 120 118 132 Provision & Contingency 44 67 80 78 85 PBT 65 47 40 40 47 Tax 18 13 9 11 13 PAT 48 33 31 29 34 Exhibit 12: Balance Sheet Y/E Mar (Rs mn) FY13 FY14 FY15 FY16E FY17E Liabilities Networth 327 359 391 414 441 Deposits 3,916 4,514 5,014 5,540 6,233 Current Deposits 299 315 336 376 429 Savings Deposits 1,235 1,414 1,502 1,697 1,952 Borrowings 396 480 457 499 599 Other liabilities & provisions 150 151 172 181 205 Total liabilities 4,789 5,504 6,033 6,634 7,478 Assets Cash & balances with RBI 179 222 242 305 343 Bal. with banks & money at call 92 230 317 333 350 Investments 1,299 1,438 1,513 1,740 1,952 Advances 3,087 3,493 3,805 4,148 4,646 Fixed assets 34 34 36 43 51 Other assets 98 87 120 66 137 Total assets 4,789 5,504 6,033 6,634 7,478 5

Exhibit 13: Key Ratios Key Ratios FY13 FY14 FY15 FY16E FY17E Per share Data (Rs.) EPS (Fully diluted) 26.9 18.5 16.5 15.5 18.1 DPS 5.4 2.0 3.3 2.5 2.9 BV 176.8 190.5 203.1 215.7 230.4 ABV 135.9 135.7 120.1 127.9 141.5 Spreads (%) Yield on Advances 10.6 9.8 9.5 9.4 9.4 Cost of Deposits 6.6 6.0 5.8 5.8 5.8 Net interest margins 3.4 3.4 3.1 2.9 2.9 Operating ratios (%) Credit to Deposit 78.8 77.4 75.9 74.9 74.5 Cost to income 42.8 45.1 46.7 49.9 49.9 Non interest income / Total income 22.1 22.1 26.2 26.6 26.2 Return ratios (%) RoE 15.7 9.7 8.2 7.1 7.8 RoA 1.0 0.6 0.5 0.5 0.5 Assets/Equity 15.5 15.0 15.4 15.7 16.5 Asset Quality ratios (%) Gross NPA 4.3 5.3 6.6 6.4 6.1 Net NPA 2.4 2.9 4.2 3.9 3.6 Provision coverage 45.3 46.3 38.1 40.3 43.0 Slippage Ratio 2.9 3.4 4.7 3.6 3.5 Provision Expenses/ PPP 40.2 58.8 66.9 66.2 64.5 Credit Cost 1.5 2.1 2.2 2.0 2.0 Growth Ratios (%) Net interest income 10.8 8.7 2.5 4.5 12.1 PPP 2.8 4.3 5.0 (1.2) 11.4 PAT (2.7) (29.7) (8.4) (6.1) 16.7 Advances 5.1 13.1 9.0 9.0 12.0 Deposits 3.2 15.3 11.1 10.5 12.5 Capital Adequacy (%) Total Capital 12.7 11.5 12.9 12.9 13.2 Tier I 9.8 8.9 9.7 8.8 8.3 Tier II 3.0 2.7 3.2 4.1 4.9 Valuation ratios (%) P/E 4.9 7.2 8.1 8.6 7.3 P/BV 0.8 0.7 0.7 0.6 0.6 P/ABV 1.0 1.0 1.1 1.0 0.9 6

Stock Ratings Absolute Returns Buy : > 15% Hold : 5-15% Sell : < 5% For further enquiries please contact: research@karvy.com Tel: +91-22-6184 4300 Disclosures Appendix Analyst certification The following analyst(s), who is (are) primarily responsible for this report and whose name(s) is/ are mentioned therein, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Disclaimer Karvy Stock Broking Limited [KSBL] is a SEBI registered Stock Broker, Depository Participant, Portfolio Manager and also distributes financial products. The subsidiaries and group companies including associates of KSBL provide services as Registrars and Share Transfer Agents, Commodity Broker, Currency and forex broker, merchant banker and underwriter, Investment Advisory services, insurance repository services, financial consultancy and advisory services, realty services, data management, data analytics, market research, solar power, film distribution and production profiling and related services. Therefore associates of KSBL are likely to have business relations with most of the companies whose securities are traded on the exchange platform. The information and views presented in this report are prepared by Karvy Stock Broking Limited and are subject to change without any notice. This report is based on information obtained from public sources, the respective corporate under coverage and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of KSBL. While we would endeavor to update the information herein on a reasonable basis, KSBL is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent KSBL from doing so. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. KSBL will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither KSBL nor any associate companies of KSBL accepts any liability arising from the use of information and views mentioned in this report. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Past performance is not necessarily a guide to future performance. Forward-looking statements are not predictions and may be subject to change without notice. Actual results may differ materially from those set forth in projections 7

November 09, 2015 Associates of KSBL might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the Punjab past twelve National Bank months. Associates of KSBL might have received compensation from the subject company mentioned in the report during the period preceding twelve months from the date of this report for investment banking or merchant banking or brokerage services from the subject company in the past twelve months or for services rendered as Registrar and Share Transfer Agent, Commodity Broker, Currency and forex broker, merchant banker and underwriter, Investment Advisory services, insurance repository services, consultancy and advisory services, realty services, data processing, profiling and related services or in any other capacity. KSBL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. Compensation of KSBL s Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. KSBL generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. KSBL or its associates collectively or Research Analysts do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. KSBL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report and have no financial interest in the subject company mentioned in this report. Accordingly, neither KSBL nor Research Analysts have any material conflict of interest at the time of publication of this report. It is confirmed that KSBL and Research Analysts primarily responsible for this report and whose name(s) is/ are mentioned therein of this report have not received any compensation from the subject company mentioned in the report in the preceding twelve months. It is confirmed that Ankit Ladhani, Research Analyst did not serve as an officer, director or employee of the companies mentioned in the report. KSBL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Neither the Research Analysts nor KSBL have been engaged in market making activity for the companies mentioned in the report. We submit that no material disciplinary action has been taken on KSBL by any Regulatory Authority impacting Equity Research Analyst activities. Karvy Stock Broking Limited Office No. 701, 7 th Floor, Hallmark Business Plaza, Opp.-Gurunanak Hospital, Mumbai 400 051 RegdOff : 46, Road No 4, Street No 1, Banjara Hills, Hyderabad 500 034. Karvy Stock Broking Research is also available on: Bloomberg - KRVY <GO>, Thomson Publisher & Reuters. 8