10 PNB Q2FY15 Result Update 22-Oct-14

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October 21, 2014

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Punjab National BankCMP: `̀̀̀̀ 931 TP: `̀̀̀̀ 1050 Accumulate High Points

• Asset quality saw anoticable deteriorationwith rise in delinquencyratio

• Slippages from therestructured loansremains high

• Reducing target price to ̀̀̀̀̀1050 and revise rating toAccumulate

Scrip Details

Equity ` 3621mnFace Value ` 10/-Market Cap ` 338bn

USD 5.5bn52 week High / Low ` 1068 / 473Avg. Volume (no) 1400639BSE Sensex 26,787NSE Nifty 7,995Bloomberg Code PNB INReuters Code PNBK.BO

Q2FY15 Result (` mn)Particulars Sep-14 Sep-13 % Chg Jun-14 % ChgInterest Income 114,621 107,335 7 115,887 (1)Interest Expended 73,109 67,180 9 72,090 1Net Interest Income 41,512 40,155 3 43,797 (5)Non-Interest Income 15,584 8,993 73 12,364 26Net Income 57,096 49,149 16 56,161 2Operating Expenses 28,335 23,800 19 24,908 14Operating profit 28,760 25,348 13 31,253 (8)Provision & Contingencies 17,679 18,987 (7) 9,276 91PBT 11,081 6,361 74 21,977 (50)Tax 5,328 1,306 308 7,926 (33)Net Profit 5,753 5,055 14 14,051 (59)

Sr. Analyst: Rajiv Pathak Associate: Pranav JoshiTel : +9122 4096 9750 Tel : +9122 4096 9706E-mail: [email protected] E-mail: [email protected]

FinancialsYear NII PPP NP NIM (%) BV (`̀̀̀̀) ABV (`̀̀̀̀) RoAA (%) RoAE (%) P/B (x) P/ABV (x) P/E (x)FY14 161,460 113,847 33,426 3.2 953 679 0.7 10.2 0.98 1.37 10.1FY15E 178,476 123,069 43,384 3.1 1,048 732 0.7 12.0 0.89 1.27 7.8FY16E 211,439 145,200 55,352 3.2 1,171 859 0.8 13.8 0.79 1.08 6.1FY17E 211,439 177,133 72,073 3.3 1,330 983 0.9 15.9 0.70 0.95 4.7Figures in ` mn.

PNB’s lower than expected performance was marred by several one offs likereversal of interest on NPLs and FITLs; additional provision for NPLs, additionalprovisions towards AS-15 and expected wage hikes. Adjusting for these, thefinancial performance would have been almost in line with the streetexpectations. That said, however, asset quality showed a noticeable deteriorationwith additions to NPLs and restructured loans rising QoQ. We are even moredisappointed by the downgrades of restructured assets to NPAs, especially inthe current environment which is relatively better. Unless these were in sectorswhich have gone bad to worse last few months, however we do not have anyinformation to corroborate further on this.

Asset quality for PNB has become quite volatile with almost alternating quartersof improvement and stress. Total stressed assets at 15.6% of total loans werehigher than in the past 4 quarters. The management did not provide for anyguidance on the asset quality trend. We believe that the situation will remainvolatile for 2HFY15 as well, before it starts to improve in FY16.

Of the total gross slippages of ` 40 bn a third emanated from restructuredloans. In all, during 1HFY15, almost 40% of the fresh NPLs are being contributedby the slippages in the restructured loans. While the pace of additions to therestructured loans can see moderation, the pace of fresh NPL formations mayremain elevated in the near term.

The bank provided an additional ̀ 6.8bn towards NPLs, ensuring that the coverageratio is maintained, which we view as positive. Additionally, it provided ̀ 2.7bnas the bank revised the assumptions relating to AS-15 and ` 600mn for theexpected wage revision. Adjusting for these the NIM and net profits would havebeen almost flat QoQ.

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DOLAT CAPITALIndia Research

PNB October 21, 2014

Yields & Margins (%) Sep-14 Sep-13 % Chg Jun-14 % ChgAsset qualityGross NPLs (` mn) 207,519 165,263 25.6 196,028 5.9Gross NPLs (%) 5.65 5.14 5.48Net NPLs ( ̀mn) 116,178 96,090 20.9 104,636 11.0Net NPLs (%) 3.26 3.07 3.02Provisioning coverage (%) 44.0 41.9 46.6

Capital (%) bps bpsTier-I 8.7 9.5 (78) 8.8 (12)CAR 11.8 12.3 (53) 11.5 27

Balance sheet (`̀̀̀̀ Bn)Advances 3,571 3,139 14 3,475 3Deposits 4,735 4,057 17 4,449 6CASA (%) 39.9 40.7 39.9

PNB continues to witness asset quality pressures both from its standard loans aswell as from the restructured loans. We believe that the bank would continue towitness these pressures in the near term which can delay its re-rating in the shortterm. Also there is an added uncertainty as extension to Mr K Kamath, CMD hasnot yet been announced against our expectation that this will go through in goodtime. However, till date there has been no clarity on that aspect, and his term endson 27th Oct. In case the current CMD's tenure ends, and there is no clarity on thenew incumbent, we believe there will be a further overhang on the stock, and will bea risk to our Accumulate stance. Notably, the government has not yet appointednew CMDs to six banks viz., BOB, Syndicate, UBI and IOB, OBC, Canara.

Over a 12 month horizon, we continue to believe that the bank can see meaningfuleasing of the asset quality related stress and gains on the bond book (AFS durationof 3.5 years). We revise our rating to Accumulate and our target price from 1150 to` 1050 valuing the bank at 1.2x on FY16 ABVPS forecasts.

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DOLAT CAPITALIndia Research

PNB October 21, 2014

IMPORTANT RATIOSParticulars Mar14 Mar15E Mar16E Mar17EDPS (`) 10 25 34 34Book Value (`) 953 1,048 1,171 1,330Adjusted Book Value (`) 679 732 859 983EPS (`) 92 120 153 199Payout (%) 10.8 20.9 22.2 17.1Tier 1 (%) 8.9 8.4 7.9 7.3CAR (%) 11.5 10.9 10.3 9.7Net interest margin (%) 3.2 3.1 3.2 3.3Credit Spread (%) 2.9 2.8 2.9 3.0Cost-to-income (%) 45.1 47.0 47.0 45.9

ROAA breakdownGross Interest spread 3.1 3.1 3.2 3.2Less Provisions 1.3 1.0 0.9 0.9Net Interest spread 1.8 2.1 2.2 2.4Less Overheads 1.8 1.9 1.9 1.9Net spread 0.0 0.2 0.3 0.4Other income 0.9 0.9 0.9 0.9Less Tax 0.3 0.4 0.4 0.5ROAA 0.7 0.7 0.8 0.9ROAE 10.2 12.0 13.8 15.9

ValuationPrice Earnings (x) 10.1 7.8 6.1 4.7Price to Book Value (x) 0.98 0.89 0.79 0.70Price to Adjusted BV (x) 1.37 1.27 1.08 0.95Dividend Yield (%) 1.1 2.7 3.7 3.7

Asset QualityGross NPLs 188,801 222,700 246,474 271,992Net NPLs 99,170 114,421 112,786 125,634Provision coverage ratio (%) 47.5 48.6 54.2 53.8Gross NPLs (%) 5.3 5.3 4.9 4.4Net NPLs (%) 2.9 2.8 2.3 2.1

AssumptionsYield on Advances (%) 9.8 9.6 9.4 9.2Yield on Investment (%) 7.5 7.2 6.9 6.8Cost of Deposits (%) 6.0 5.8 5.5 5.3Growth in credit book (%) 13.1 17.0 20.0 22.0Growth in Deposits (%) 15.3 16.0 19.0 21.0Growth in Investments (%) 10.7 10.0 8.0 10.0Gross slippages ratio (%) 3.4 3.4 2.5 2.1Credit Cost (%) 1.53 1.60 1.34 1.19E-estimates

INCOME STATEMENT `̀̀̀̀ mnParticulars Mar14 Mar15E Mar16E Mar17EInterest Income 432,233 477,161 540,511 627,215Interest Expenses 270,773 298,684 329,072 374,076Net Interest Income 161,460 178,476 211,439 253,139CEB 27,760 32,757 38,653 46,384Profits on sale of investments 5,490 6,588 7,774 9,717Profits on foreign exchange 5,440 5,984 6,882 8,051Other operating income 7,079 8,495 9,345 10,279Total other income 45,769 53,824 62,653 74,432Total Income 207,229 232,300 274,093 327,570Salaries 65,105 78,125 92,188 107,860Other operating costs 28,278 31,106 36,705 42,577Total Overheads 93,382 109,231 128,893 150,437Profit before provisions 113,847 123,069 145,200 177,133Total provisions 66,939 58,318 61,333 67,931Profit before tax 46,908 64,752 83,867 109,202Tax 13,481 21,368 28,515 37,129Reported Net profit 33,426 43,384 55,352 72,073

BALANCE SHEETParticulars Mar14 Mar15E Mar16E Mar17ECash with RBI and Call Money 452,185 438,619 482,481 540,379Investments 1,437,855 1,581,641 1,708,172 1,878,989Advances 3,492,691 4,086,449 4,903,738 5,982,561Fixed Assets 20,116 20,616 21,116 21,616Other Assets 87,271 79,248 90,164 112,638Total Assets 5,490,118 6,206,572 7,205,671 8,536,182

Demand Deposits 314,992 628,344 747,730 904,753Savings Deposits 1,413,429 1,466,137 1,744,703 2,111,090Term Deposits 2,785,546 3,141,721 3,738,648 4,523,765Total Deposits 4,513,967 5,236,202 6,231,081 7,539,608Borrowings 480,344 432,310 389,079 350,171Other Liabilities & Provisions 150,934 158,481 161,651 164,884Equity 3,621 3,621 3,621 3,621Reserves 341,251 375,958 420,240 477,899Total Equity 344,872 379,579 423,861 481,520Total Liab & Equity 5,490,118 6,206,572 7,205,671 8,536,182E-estimates

Shareholding Pattern as on Sept'14 (%)

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10 PNB Q2FY15 Result Update 22-Oct-14

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