Punjab National Bank. CMP:INR1,103 TP:INR1,500 Buy

BSE SENSEX S&P CNX 18,210 5,488 28 July 2011 1QFY12 Results Update Sector: Banking Punjab National Bank CMP:INR1,103 TP:INR1,500 Buy Bloomberg PNB IN Equity Shares (m) 316.8 52-Week Range (INR) 1,395/971 1,6,12 Rel.Perf.(%) 4/1/2 M.Cap. (INR b) 349.4 M.Cap. (USD b) 7.9 Punjab National Bank (PNB) reported 3.4% YoY growth in PAT for 1QFY12 to INR11.1b - 2% higher than our estimate of INR10.8b. NIM decline of just 8bp QoQ despite higher proportion of savings (30%) deposits is a positive surprise, especially considering the results reported by peers. Key highlights are: Gross slippages were INR11.8b in 1QFY12 v/s INR12.5b in 4QFY11. The annualized slippage ratio for 1QFY12 stood at 1.94% v/s 2.7% in 4QFY11 and 2.32% for FY11. Strong recoveries and upgradations during the quarter came as a positive surprise (INR6.5b v/s INR4b a quarter ago and INR5.4b a year ago). During the quarter, PNB restructured loans worth INR5.6b (~25bp of total loans). Gross restructured loans stood at 6.5% of total loans v/s 6.3% a quarter ago. Of the restructured loans, INR2.83b slipped during the quarter. Robust fee income growth of over 25% YoY during the quarter was a positive surprise. Trading profits were lower at INR480m v/s INR530m a quarter ago and INR1.2b a year ago. Higher opex surprised negatively (19% higher than our estimate). Retirement benefit related provisions and strong branch expansion (opened 125 branches during the quarter) resulted in higher opex. Valuation and view: Over the last two years, the management has consistently surprised on the margin front (despite higher slippages), demonstrating the strong ALM and benefit of high CASA ratio. The margin performance should be viewed in the context of the numbers delivered by peer banks - over 25bp+ QoQ NIM decline. We expect recoveries and upgradations to pick up after high slippages in the last two years. High NIM and increase in fee income to provide cushion against higher credit cost. The management reiterated its guidance of 3.5%+ NIM and ~2% GNPA. We expect RoA to remain strong at 1.3% and RoE at 24%. PNB remains one of our preferred picks among state-owned banks. Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com) + 91 22 3982 5415 Sohail Halai (Sohail.Halai@motilaloswal.com)+ 91223982 5430

Quarterly performance v/s our estimates and reasons for deviation (INR m) Y/E March 1QFY12A 1QFY12E % Variance Comments Net Interest Income 31,153 30,328 3 Margin decline of just 8bp QoQ a positive surprise % Change (Y-o-Y) 20 17 Other Income 10,837 8,868 22 Strong growth in fee income Net Income 41,990 39,196 7 Operating Expenses 17,250 14,473 19 Retired employees benefit provisions Operating Profit 24,739 24,723 0 Higher opex compensated by higher other income % Change (Y-o-Y) 18 18 Other Provisions 8,935 8,802 2 Profit before Tax 15,804 15,921-1 Tax Provisions 4,753 5,095-7 Net Profit 11,051 10,826 2 Core operating performance better than est % Change (Y-o-Y) 3 1 Source: Company/MOSL NIM declines just 8bp QoQ NIM declined ~8bp QoQ to 3.84%, a positive surprise. Yield on loans increased 55bp QoQ to 11.4% and cost of deposits increased 64bp QoQ to 6.3%. Yield on investments also improved by 55bp QoQ due to general increase in interest rates and higher proportion of short-term investments. The management has guided NIM of 3.5%+ for FY12. We model in margin decline of ~30bp for FY12. Business growth moderates QoQ Loans were flat QoQ and grew 23% YoY to INR2.4t. Deposits grew ~3% QoQ and 27% YoY to INR3.24t. CD ratio has declined to 75% v/s 77% a quarter ago. CASA deposits grew ~16% YoY and were flat QoQ at INR1.2t. Savings deposits grew 16% YoY and 1.5% QoQ to INR948b, constituting 30% of deposits. Reported CASA ratio declined 110bp QoQ to 38.1% and the proportion of bulk deposits increased to 24% v/s 22.8% a quarter ago. Though PNB has resorted to bulk funds for loan growth, it has been able to sustain its margins at healthy levels, demonstrating its superior asset-liability management. Improvement in upgradations and recoveries a positive surprise Gross slippages during the quarter were INR11.8b v/s INR12.5b in 4QFY11. The annualized slippage ratio for 1QFY12 was at 1.94% v/s 2.32% for FY11. One of the reasons for high slippages during the quarter was the slippage of INR2.8b from restructured loans. Besides, PNB has also moved to system-based NPA recognition for accounts of INR1m and above (INR5m and above last quarter), which may have contributed to higher slippages. Strong recoveries and upgradations (INR6.5b v/s INR4b a quarter ago and INR5.4b a year ago) during the quarter came as a positive surprise. Write-offs (INR110m v/s INR10b in 4QFY11 and INR2.76b in 1QFY11) were negligible, leading to improvement in PCR (calculated) to 57.3% v/s 53.4% a quarter ago. Overall GNPA increased 12% QoQ (in absolute terms). However, improvement in coverage ratio led to lower increase of 3% QoQ in NNPA. In percentage terms, GNPA stood at 2% (increased 20bp QoQ) while NNPA was at 0.88% (v/s 0.85% a quarter ago). PCR (calculated) increased (due to lower write-offs) to 57% v/s 53.4% a quarter ago and PCR including technical write-offs was at 74.3% (v/s 28 July 2011 2

73.2% a quarter ago). PNB restructured fresh loans worth INR5.6b (~23bp of loans) during 1QFY12. The outstanding restructured book stood at INR159b (6.5% of loan book), and cumulatively, restructured loans of INR20.1b (12.7% of outstanding restructured book) have slipped into NPAs. Non-interest income higher than estimate, led by core income At INR10.8b, non-interest income was 22% higher than our estimate, driven by strong fee income and higher dividend income from MF. Core fee income (ex-forex and income from MF) grew 28% YoY to INR6.7b. Recoveries were at INR1.1b v/s INR2.2b in 4QFY11 and INR760m in 1QFY11. Trading profits for 1QFY12 were INR480m v/s INR530m in 4QFY11. The bank also earned INR1.25b income from MF v/s INR1.2b in 4QFY11 and INR580m in 1QFY11, driving profitability. Forex income for the quarter was INR1.3b v/s ~INR1.1b in 4QFY11 and 1QFY11. Higher retirement benefit related provisions leading to higher opex Opex was significantly higher than our estimate, led by higher than estimated employee expenses. For retirement benefits, PNB has provided INR2.5b towards pension, INR500m towards gratuity, and INR270m towards other retirement related benefits. It provided INR1.7b for second pension option liability and INR110m for transitional liability. In all, retirement-related benefits were INR5.1b v/s INR3.5b a year ago, leading to high employee expenses. During the quarter, PNB opened 125 branches (targeting to open 200 branches in FY12), which led to ~30% increase in other expenditure. Other details Provisioning during the quarter was INR8.9b (in line with our estimate), of which provisioning for NPA was INR5.7b (including INR2.43b for changes in regulatory requirements), leading to credit cost of 93bp (core credit cost at 53bp). Provisioning for standard assets was INR1.6b (including restructured loan provisions of INR1.5b). Excluding one-off regulatory provisioning, PBT grew 37% YoY v/s reported growth of 18% YoY. Tax rate stood at 30.1% v/s our expectation of 32%. PNB is likely to pick up 30% stake via fresh investment in Metlife Insurance for an undisclosed amount. Valuation and view Over the last two years, the management has consistently surprised on the margin front (despite higher slippages), demonstrating the strong ALM and benefit of high CASA ratio. The margin performance should be viewed in the context of the numbers delivered by peer banks - over 25bp+ QoQ NIM decline. We expect recoveries and upgradations to pick up after high slippages in the last two years. High NIM and increase in fee income to provide cushion against higher credit cost. The management reiterated its guidance of 3.5%+ NIM and ~2% GNPA. We expect RoA to remain strong at 1.3% and RoE at 24%. We have increased our opex assumption considering the guidance of higher provisions for retirement related benefits. 28 July 2011 3

We expect PNB to report earnings CAGR of 20% over FY11-13. We estimate BV at INR769 for FY12 and INR934 for FY13. The stock trades at 1.4x FY12E BV and 1.2x FY13E BV. Maintain Buy, with a target price of INR1,500 (1.6x FY13E BV) - upside of 35%. PNB remains one of our preferred picks among state-owned banks. Marginal change in our earnings estimates (INR b) Old Estimates Rev. Estimates Change (%) FY12 FY13 FY12 FY13 FY12 FY13 Net Interest Income 136.5 164.4 134.8 160.3-1.3-2.5 Other Income 40.5 46.1 41.7 48.3 2.9 4.8 Total Income 177.1 210.5 176.5 208.6-0.3-0.9 Operating Expenses 68.0 75.9 73.5 80.1 8.0 5.5 Operating Profits 109.0 134.6 103.0 128.5-5.5-4.5 Provisions 29.0 37.9 24.5 34.1-15.5-10.0 PBT 80.0 96.7 78.5 94.4-1.9-2.3 Tax 25.6 30.9 25.1 30.2-1.9-2.3 PAT 54.4 65.7 53.4 64.2-1.9-2.3 Loans 2,954 3,604 2,929 3,545-0.8-1.6 Deposits 3,817 4,657 3,817 4,657 0.0 0.0 Margins (%) 3.6 3.6 3.6 3.5 Credit Cost 0.9 1.0 0.7 0.9 RoA 1.3 1.3 1.3 1.3 RoE 24.4 24.1 24.0 23.8 Source: MOSL Punjab National Bank: One year forward P/E Punjab National Bank: One year forward P/BV 12 P/E (x) Avg(x) Peak(x) Min(x) 9 9.2 7 4 6.4 6.1 2 2.8 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 28 July 2011 4

Quaterly trends Loan growth moderates Deposits grew 27% YoY (on a lower base) Loans were flat QoQ but grew 23% YoY Deposits growth largely in line with industry average Reported CASA ratio declined 110bp QoQ (%) CD ratio moderates (%) Savings deposits grew 16% YoY and 1.5% QoQ, and constitute 30% of deposits Flat loan growth QoQ led to ~250bp decline in CD ratio Cost of deposits up 64bp QoQ NIM decline of just 8bp QoQ is a positive surprise (%) Proportion of bulk deposits increased to 24% v/s 22.8% a quarter ago The management has consistently surprised on the margin front, demonstrating its strong asset-liability management and benefit of high CASA ratio 28 July 2011 5

Quarterly trends (coninued) Strong fee income (including forex) growth (INR b) Contribution of non-core income remains low (INR b) 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 3.9 4.5 5.5 5.2 6.1 5.9 6.1 6.8 6.9 5.9 6.5 8.7 9.3 Fee income (including forex) grew 34% YoY Core operating profit grew 22% YoY Core cost to income remains stable (%) Annualized slippage ratio for 1QFY12 was 1.94% 55.2 47.8 47.1 44.6 45.4 46.1 45.4 45.6 2.6 Slippages (INR b) Slipapge Ratio (%) 2.9 2.6 2.7 2.2 2.0 2.1 1.9 1.4 0.8 37.1 0.1 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 7.7 0.2 5.3 3.3 11.3 8.5 12.2 9.1 9.8 12.5 11.8 Opex higher than estimated - in all, retirement related benefits were INR5.1b v/s INR3.5b a year ago, leading to high employee expense Annualized credit cost at 0.9% Higher slippages during the quarter were led by slippages from restructured loans and transition to system-based NPA recognition for accounts of INR1m and above GNPA increased 12% QoQ (in absolute terms) 0.2 0.6 1.2 0.4 0.4 0.1 0.8 1.0 1.1 0.7 1.0 0.9 0.9 GNPA (%) NNPA (%) PCR (cal %) 90 90 91 83 78 83 74 69 64 65 65 53 57 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2.8 0.6 2.4 0.4 2.3 0.4 1.8 0.2 1.8 0.2 1.6 0.1 1.8 0.5 1.7 0.5 1.8 0.7 1.9 0.7 2.0 0.8 1.8 0.9 2.0 0.9 0.6 2.1 4.0 3.4 4.2 1.9 2.3 2.8 2.0 1.3 2.1 2.7 1.6 Continuous higher slippages leading to higher credit cost; however, risk-adjusted NIM remains amongst the best Improvement in coverage ratio led to lower increase of 3% QoQ in NNPA 28 July 2011 6

Quarterly Snapshot FY10 FY11 FY12 Variation (%) INR m 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q QoQ YoY Profit and Loss Net Interest Income 17,985 19,922 22,123 24,751 25,983 29,767 32,033 30,290 31,153 3 20 Other Income 10,334 7,713 8,478 9,575 8,917 7,183 8,572 11,454 10,837-5 22 Trading profits 3,585 1,500 1,570 1,380 1,210 380 870 530 480-9 -60 Forex Income 610 580 800 1,380 1,130 310 1,250 1,090 1,310 20 16 Recoveries 640 350 770 1,400 760 890 1,230 2,210 1,090-51 43 Dividend from Liquid MF 610 1,010 1,120 480 580 220 170 1,200 1,260 5 117 Core Fees 4,890 4,273 4,218 4,935 5,237 5,383 5,052 6,424 6,697 4 28 Total Income 28,320 27,636 30,601 34,326 34,901 36,950 40,605 41,744 41,990 1 20 Operating Expenses 12,626 11,573 12,419 11,001 13,919 15,949 17,106 16,668 17,250 3 24 Employee 9,076 7,276 8,327 6,532 9,952 11,131 12,235 11,293 12,126 7 22 Others 3,550 4,297 4,092 4,469 3,967 4,818 4,871 5,376 5,124-5 29 Operating Profits 15,693 16,063 18,182 23,325 20,982 21,001 23,499 25,075 24,739-1 18 Provisions 3,018 2,160 2,819 6,219 5,341 5,160 7,139 7,279 8,935 23 67 NPA provisions 1,470 570 3,260 4,620 5,480 3,590 5,550 5,440 5,660 4 3 Provisions on Invst. -500 830 420 40 140 670 440 470 1,340 N.A. N.A. Others 2,048 760-861 1,559-279 900 1,149 1,369 1,935 41-794 PBT 12,676 13,903 15,363 17,106 15,640 15,841 16,360 17,796 15,804-11 1 Taxes 4,355 4,634 5,250 5,756 4,958 5,095 5,463 5,787 4,753-18 -4 PAT 8,321 9,270 10,113 11,350 10,683 10,746 10,898 12,009 11,051-8 3 Ratios (%) Fees to Total Income 17.3 15.5 13.8 14.4 15.0 14.6 12.4 15.4 15.9 Cost to Core Income 55.2 47.8 47.1 37.1 44.6 45.4 46.1 45.4 45.6 Tax Rate 34.4 33.3 34.2 33.6 31.7 32.2 33.4 32.5 30.1 CASA (Cal) 38.3 38.5 39.5 40.8 40.9 40.6 39.1 38.5 37.4 Loan/Deposit 72.1 70.9 72.8 74.8 77.1 76.4 76.6 77.4 74.9 CAR 14.5 14.7 14.6 14.2 14.4 13.6 13.3 12.4 12.4 Tier I 9.1 9.4 9.3 9.2 9.3 9.0 9.0 8.4 8.5 Margins - Quarterly (%) Yield on loans 10.5 10.8 10.4 10.2 10.2 10.6 10.6 10.8 11.4 55 114 Yield On Investments 6.7 6.6 5.8 6.6 7.3 6.7 6.8 7.1 7.7 55 39 Yield on Funds 8.3 8.2 8.0 7.7 8.0 8.2 8.3 8.3 8.7 42 73 Cost of Deposits 5.9 5.7 5.2 4.9 5.0 5.0 5.2 5.6 6.3 64 126 Cost of Funds 5.4 5.1 4.7 4.4 4.5 4.4 4.5 4.9 5.4 53 94 Spreads 2.9 3.1 3.3 3.3 3.5 3.8 3.7 3.4 3.3-11 -21 Margins 3.2 3.5 3.6 4.0 3.9 4.1 4.1 3.9 3.8-7 -7 Margins - Cumulative (%) Yield on loans 10.5 10.7 10.5 10.4 10.3 10.4 10.5 10.6 11.4 80 110 Yield On Investments 6.7 6.1 6.0 6.7 6.8 6.5 6.6 6.7 7.7 98 87 Yield on Funds 8.3 8.2 8.2 7.9 7.9 7.9 8.1 8.1 8.7 58 78 Cost of Deposits 5.9 5.8 5.6 5.4 5.0 5.0 5.1 5.2 6.3 104 126 Cost of Funds 5.4 5.2 5.1 4.8 4.5 4.4 4.4 4.6 5.4 87 94 Spreads 2.9 3.0 3.1 3.1 3.4 3.6 3.6 3.6 3.3-29 -16 Margins 3.4 3.4 3.4 3.6 3.9 4.0 4.0 4.0 3.8-12 -10 Franchise Branches 4,472 4,615 4,894 5,039 5,020 5,000 5,017 5,161 5,286 125 266 ATM 2,340 2,455 2,910 3,544 3,715 4,000 4,400 5,050 5,375 325 1,660 Source: Company/MOSL 28 July 2011 7

Quarterly Snapshot (continued) FY10 FY11 FY12 Variation (%) INR b 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q QoQ YoY Balance Sheet Loans 1,580 1,636 1,704 1,866 1,969 2,088 2,213 2,421 2,429 0 23 Investments 653 701 740 781 810 866 884 955 1,010 6 25 Deposits 2,190 2,308 2,339 2,493 2,553 2,734 2,889 3,129 3,241 4 27 Deposits Break Up Corel Deposits 1,748 1,762 1,804 1,923 2,075 2,178 2,241 2,415 2,463 2 19 % to total Deposits 80 76 77 77 81 80 78 77 76-118 -527 Other Deposits 442 546 536 570 478 556 648 714 778 9 63 % to total Deposits 20 24 23 23 19 20 22 23 24 118 527 Deposits Break Up CASA Deposits 839 888 925 1,019 1,044 1,110 1,128 1,203 1,213 1 16 % to total Deposits 38 38 40 41 41 41 39 38 37-104 -347 Savings 648 698 726 781 818 873 899 935 949 1 16 % to total Deposits 30 30 31 31 32 32 31 30 29-60 -278 Current 192 191 199 237 225 237 229 268 264-2 17 % to total Deposits 9 8 8 10 9 9 8 9 8-44 -69 Term Deposits 1,350 1,420 1,415 1,475 1,510 1,624 1,761 1,926 2,028 5 34 % to total Deposits 62 62 60 59 59 59 61 62 63 104 347 Loan Break Up Agriculture 236 250 272 302 302 323 339 355 342-4 13 SME Loans 147 310 195 207 201 235 252 268 273 2 36 Retail Loans 166 170 179 192 194 226 217 236 242 2 24 Other loans 1,031 905 1,059 1,165 1,271 1,304 1,404 1,562 1,573 1 24 Asset Quality Movement of NPA -Quarterly Opening 25.1 26.1 26.2 31.6 32.1 36.1 40.2 45.4 43.8 Additions 5.3 3.3 11.3 8.5 12.2 9.1 9.8 12.5 11.8-6 -3 Deductions 4.3 3.2 5.9 7.9 8.2 5.0 4.6 14.1 6.6-53 -19 Cash Recovery 1.6 2.4 1.9 3.5 4.1 3.1 2.4 2.3 4.2 79 2 Upgradation 1.8 0.7 0.1 0.7 1.3 0.7 0.3 1.8 2.3 31 76 Write offs 0.9 0.0 3.9 3.7 2.8 1.3 1.9 10.0 0.1-99 -96 Closing 26.1 26.1 31.5 32.2 36.1 40.2 45.4 43.8 48.9 Slippage Ratio (%) 1.4 0.8 2.9 2.2 2.6 2.0 2.1 2.7 1.9-73 -66 Credit cost (%) 0.4 0.1 0.8 1.0 1.1 0.7 1.0 0.9 0.9-1 -21 CAR Risk weighted Assets 1,600 1,697 1,809 1,902 1,990 2,161 2,284 2,488 2,463-1 24 Tier I Capital 146 160 168 174 173 174 173 210 210 0 21 Tier II Capital 86 91 96 95 101 99 99 99 96-3 -5 Source: Company/MOSL 28 July 2011 8

Stock Info EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY12 168.5 166.4 1.3 FY13 202.7 199.9 1.4 1-year Sensex rebased Punjab National Bank 1,500 1,350 Sensex - Rebased Shareholding pattern (%) Jun-11 Mar-11 Jun-10 Promoter 58.0 58.0 57.8 Domestic Inst 17.4 17.5 18.2 Foreign 19.3 19.4 19.1 Others 5.3 5.2 4.9 1,200 1,050 900 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 28 July 2011 9

Financials and Valuation 28 July 2011 10

Financials and Valuation 28 July 2011 11

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