Punjab National Bank - Moneycontrol

WAY2WEALTH Securities Pvt. Ltd., 15/A Chander Mukhi, Nariman Point, Mumbai - 400 021. Tel: +91 22 4019 2900

13th July, 2011

Recommendation Buy

Target Price Rs.1350

Upside ~21%

Key Data

BSE Code 532461

NSE Code PNB

Reuters Code PNBK.BO

Bloomberg Code PNB.IN

Sensex 18,412

Nifty 5,526

CMP, Rs 1,117

No.of Shares,mn 317

Face Value, Rs. 10

Mcap, Rs mn 353,879

Mcap, USD mn (at Rs.45) 7,864

52 week H/L 1,395 / 971

2W, Avg Qty, BSE (mn) 0.02

Shareholding – Apr‘11 % Holding

Government of India 58.0

Institutions 36.8

Non-Institutions 5.2

Total 100.0

Shareholding >2% , Apr‘11

Lazzard Asset Mgt 5.0

LIC of India 2.8

Janus Overseas Fund 2.5

Comparative Price Movement

Website: www.pnbindia.in

Analyst: Abhishek Kothari

Email: [email protected]

Contact: 022 – 40192900

Punjab National Bank (PNB) is a Delhi based PSU bank with a branch network of 5,189 branches & a business of Rs.5,550 bn. Currently the 2nd largest bank in India, it has a high CASA ratio on account of ~62% of its branches in the rural & semi-urban areas. Majority of the business of PNB comes in from the northern states like Punjab, Delhi, Haryana, Uttar Pradesh, etc. PNB has been consistent in performance with respect to margins and healthy return ratios over the last few years.

Investment Argument High CASA ratio PNB has been able to enjoy higher CASA historically mainly on account of its presence in the rural & semi-urban areas. Currently, 62% of the branches of PNB are in rural & semi-urban areas. In our view, this presence will continue to help PNB in maintaining its CASA at ~40% over the next couple of years. Higher CASA share has helped the bank in maintaining its cost of funds at lower end & enjoy better margins than its peers. Margins to be at the higher end, healthy return ratios expected Higher CASA ratio coupled with healthy business growth would be the key driver for the bank’s profitability. We believe that NIM for the industry peaked out last year, however with the kind of benefit that PNB derives from its CASA franchisee, we expect PNB to still sustain its NIMs at a higher level of ~3.5%. With the focus of PNB towards high yielding portfolio like MSME and retail, we expect other income to improve going forward. Lower provisions seen in the next couple of years, would drive in sustaining the return ratios at healthy levels. Asset quality has improved, but concerns remain PNB faced asset quality concerns in FY06-FY08 when its slippages were high and GNPA was at ~2.78% in FY08. Although the bank has improved its performance drastically & brought down the GNPA level to 1.8% in FY11, we have concerns over the high restructured book. The other cause of concern is the increase in total slippages during FY11, wherein the slippages increased by ~52.8% y-o-y, there by increasing the GNPA by ~36.2% y-o-y. However, recovery too has been strong for the bank in FY11. Valuation Currently at Rs.1,117, the stock is available at price to adj book value (P/ABV) of 1.23x of FY13E. We expect healthy growth in the business of the bank coupled with high CASA franchisee. We believe that the recent correction in the market has made the stock attractive for investment. We value the bank’s business at 1.48x FY13E P/ABV and initiate coverage on the stock with a price target of Rs.1,350 which is an upside of ~21% from the CMP.

0

50

100

150

200

PNB SENSEX BANK NIFTY

Key Financials

Particulars FY09 FY10 FY11 FY12E FY13E

NII (Rs, bn) 68.3 85.2 118.1 132.9 159.0

Operating Profit (Rs, bn) 56.9 73.3 90.6 107.2 127.8

PAT (Rs, bn) 26.6 39.1 44.3 53.8 66.8

NIM (%) 3.4 3.5 3.9 3.5 3.5

RoAA (%) 1.2 1.4 1.3 1.3 1.3

RoAE ( %) 19.7 24.1 22.6 22.6 23.0

Punjab National Bank Initiating Coverage

Investment Argument Top management augurs well for growth

Historically, the performance of a PSU bank has always been driven by its top management. Mr. K R Kamath joined PNB as CMD in Oct’09 and is in seat till Aug’14 which provides comfort to the implementation of top management’s ideas and vision which will be the key in the successful operations of the bank for the next couple of years.

Second largest bank by business & reach

After SBI, PNB is the largest bank by business size and branches. PNB has majority of its network present in the northern states like Punjab, Delhi, etc., which forms the largest regional contributor to PNB’s business of Rs.5,550 bn. In terms of branch network too, PNB is the second largest bank in India having a presence through 5,189 branches spread across India. The higher penetration of branches is in the northern region.

Source: Company, W2W Research

Strong & sustainable CASA

The high presence in the rural & semi-urban areas has enabled PNB to enjoy the benefits of strong CASA in its liability side of the balance sheet. Although, the bank’s share of branches in the rural area has come down from as high as 47.5% in FY07 to ~39% as on FY11; this has helped the bank in growing & sustaining its CASA book at high levels. We expect the same to continue with more branch roll outs & the competitive strength of the bank to help it sustain CASA at ~40% till FY13E. We expect the CASA to sustain at these levels due to ~62% of the branch network in rural & semi-urban which is a key differentiator between PNB & its peers.


CASA is on the higher side in the industry

PNB’s CASA is one on the higher side in the industry. If we compare CASA to NIM beneficiary, PNB is the second best amongst the large banks & the best amongst PSU banks. In the current scenario where there is a concern in banks of CASA customers moving towards term deposits due to higher interest rates offered to the term depositors, we believe this concern to be taken care in PNB’s case due to its significant presence in rural & semi-urban area. We expect CASA to move towards the 40% levels by FY13E.

0

5,000

10,000

15,000

Branch Strength

No.of Branches

0

6,000

12,000

18,000

Business Size

Rs, bn

48% 47%43%

40% 39%

0%

15%

30%

45%

60%

0

550

1100

1650

2200

FY07 FY08 FY09 FY10 FY11

Rural Semi-urban Urban Metro Rural (%) (RHS)

Branch Distribution

No.of Branches

0%

13%

25%

38%

50%

0

500

1000

1500

2000

FY08 FY09 FY10 FY11 FY12E FY13E

CASA (Rs, bn) (LHS) CASA (%) (RHS)

Current Account Saving Account

Source: Company, W2W Research; UBI (I) – United Bank of India

CASA has been dominant on the SA front

PNB’s CASA has grown at a CAGR of ~18.9% from FY08 to FY11. This has been led by saving bank account where the CAGR during the same period has been 20.3% in comparison to 14.7% CAGR in the current account. While the CASA per branch grew at a CAGR of ~11.4% between FY08 to FY11; the share of savings accounts in CASA has increased from 71.5% in FY06 to 77.7% in FY11. PNB has been able to grow its SA book mainly on account of the rapid branch expansion in the urban & metro cities where in the bank opened 560 branches in metro & urban cities in comparison to the total addition of 925 branches between FY08 to FY11.


SA to continue having higher share

As mentioned earlier, the CASA was led by a healthy growth in SA. Going forward, we expect the SA to continue having a higher share in the CASA. The business per branch has grown from Rs.478 mn in FY06 to Rs.1.07 bn in FY11, registering a CAGR of 17.5% between FY06 to FY11. The profit per branch has increased from Rs.2.3 mn in FY06 to Rs.8.5 mn in FY11, which has shown a CAGR of ~30% during the same period. The growth in profitability is on account of improvement in CD ratio, steadiness in CASA and increase in contribution from other income to total income. The share of other income to total income has increased from 8.3% in FY07 to as high as 14.2% in FY10 & currently stood at 11.8% in FY11.


0%

15%

30%

45%

60%

Current Account Saving Account (%)

0%

2%

4%

6%

8%

Net Interest Margin (%)

57%61% 59% 62% 61% 60%

0%

25%

50%

75%

FY 08 FY 09 FY 10 FY 11 FY 12E FY 13E

Current Account Deposits Saving Bank Deposits Term Deposits

Deposit Mix (%)

144157

168 175

204

232

0

50

100

150

200

250

FY 06 FY 07 FY 08 FY 09 FY 10 FY 11

CASA Per Branch

Amt(INR, mn)

2.3

3.7

4.85.7

7.8

8.5

0.0

2.5

5.0

7.5

10.0

0

275

550

825

1100

FY 06 FY 07 FY 08 FY 09 FY 10 FY 11

Business Per Branch (LHS) Profit Per Branch (RHS)

Branch Productivity (Rs, mn)

0

1100

2200

3300

4400

5500

FY 06 FY 07 FY 08 FY 09 FY 10 FY 11

Branch Strength (Number)

Business has grown by 27.3% in FY11

PNB has recorded a strong business growth of 27.3% with the deposits growing by a healthy 25.5% y-oy- & advances by a robust 29.8% y-o-y in FY11. We expect the growth rates to come down in the future but it will remain above the system’s growth rate. PNB’s deposits have grown at a CAGR of 22.3% between FY07 to FY11, while its advances registered a CAGR of 25.8% during the same period and the overall business of the bank increased from Rs.2,365 bn in FY07 to Rs.5,550 bn in FY11 registering a CAGR of 23.8% during the period.

Source: Company, W2W Research The incremental business has grown at a CAGR of 23.1% between FY06 to FY11. This

has been led by a CAGR of 25.8% in deposits & a CAGR of 20.4% in advances between FY06 to FY11. The incremental CD ratio has been more than 80% during the period.


Advances growth led by MSME & large industry MSME grew at a CAGR of 32.4% Large industry grew at a CAGR of 31.2% Retail grew at a CAGR of 15.5% Other advances grew at a CAGR of 25.1%

The advances grew at a CAGR of 22.9% between FY08 to FY11 led by a strong growth in MSME & large industry while the commercial real estate book was more or less flat. The MSME book grew by a healthy CAGR of 32.4% between FY08 to FY11 and the outstanding book stood at Rs.268.48 bn which is nearly double the book size of FY09. The large industry book grew by a healthy CAGR of 31.2% between FY08 to FY11 and the outstanding book stood at Rs.872.24 bn. The retail book grew by a CAGR of 15.5% between FY08 to FY11 and the outstanding book was at Rs.236.21 bn. The commercial real estate book grew by a mere CAGR of 1.41% between FY08 to FY11 and the outstanding book stood at Rs.97.31 bn. In fact, this book stood at Rs.146.95 bn in FY09. The agri, food & allied book grew by a CAGR of 13.6% between FY08 to FY11 and the outstanding book was at Rs.398.83 bn. Other advances grew by a healthy CAGR of 25.1% between FY08 to FY11 and the outstanding book stood at Rs.437.8 bn.

-

1,600

3,200

4,800


Deposits (Rs, bn) Advances (Rs, bn)

Business Mix

72% 74% 75% 77% 78% 77%

0%

25%

50%

75%

100%


CD Ratio (%)

0

220

440

660

FY06 FY07 FY08 FY09 FY10 FY11

Deposit (Rs, bn) Advances (Rs, bn)

Incremental Business Mix

109% 109%

86% 81% 81%87%

0%

40%

80%

120%


IncrementalCD Ratio (%)


Investment Book The investment book of PNB grew at a healthy CAGR of ~20.2% between FY07 to FY11.

The investment – deposit ratio however has fallen from 34.3% in FY06 to 30.1% in FY11. The G-Sec book grew at a healthy CAGR of ~21.4% between FY07 to FY11. The G-sec to deposit ratio fell from 28% in FY06 to 25% in FY11.


NIM has been consistently at higher levels

The net interest margin (NIM) of PNB has always been consistent at ~3.5% levels which is one on the higher side seen in the industry. This has been mainly on account of improvement in CD ratio, lending towards high yielding MSME segment and sustaining higher CASA.

Improvement in CD ratio is one of the key to NIM sustainability

Credit – Deposit (CD) ratio of PNB has improved from as low as ~62% in FY06 to ~77% in FY11. The improvement in CD ratio enabled the bank to earn higher income from high yielding advances rather than their dependency on investment income which earned them slightly lower yields.


High CASA helped in sustaining the cost of deposit at lower levels

The sustainability of CASA at high levels has been one of the major reasons for the high NIM of the bank over the last few years. The incremental CASA to deposit ratio on an average has been ~29% - 30% levels for the bank. This has been mainly possible on account of the large network of the bank in rural & semi-urban areas.

Agri17%

MSME12%

Large Industry38%

Retail10%

Real Estate4%

Others19%

Advance Mix (FY11)

0%

10%

20%

30%

40%

50%

FY08 FY09 FY10 FY11

Agri MSME Large Industry Retail Real Estate Others

Advance Break-up (%)

0%

25%

50%

75%

100%


Govt Sec Others Debt & Bonds Shares Subs & JV

Investment Book (%)

28% 26% 27% 26% 26% 25%

0%

8%

16%

24%

32%


G-Sec to Deposit Ratio (%)

9.2%10.4%

11.4%10.4% 10.6%

7.1% 6.9% 6.9% 6.7% 6.7%

0%

3%

6%

9%

12%

15%


Yield on Adv Yield on Invt

Yields (%)

69.1% 71.8% 73.8% 74.8% 77.4%

32.3% 32.3% 29.9% 30.9% 30.1%

0%

20%

40%

60%

80%

100%


CD Ratio Invt - Dep Ratio

Ratios (%)

The costs of deposits were generally in the 5.2 – 5.6% range from FY07 to FY11. We expect CASA to be sustainable at ~40% levels for the bank till FY13E & hence NIM at ~3.5% till FY13E which is on the higher side in the industry.


NIM has sustained at higher level

The net interest margin of PNB has been on the higher side in the industry mainly on account of sustainability in high CASA. The improvement in CD ratio and shift towards MSME & large industry segment also aided in sustaining NIM at higher levels. However, going forward we expect the NIM to slightly moderate to ~3.5% levels in FY12E & FY13E; but it will still continue to be on the higher side in the industry. The margin pressure will be witnessed across industry due to the recent hikes in deposit rates which have been higher than the lending rates.


Thrust on improving fee income

Over the past few years, PNB has been consistently improving the share of other income to total income. The core fee income has been strong on account of LC/LG income and the processing fees. PNB has a diversified portfolio of core fee income. The core fee income constitutes a major portion of the other income, which reduces their dependency on the fluctuating treasury income. We expect the fee income to remain strong on the back of diversified portfolio of fee based income and healthy credit growth.


4.5%

5.6%

6.3%

5.4% 5.2%

0%

2%

4%

6%

8%


Cost of Deposits (%)

0.0%

15.0%

30.0%

45.0%

60.0%

0

55

110

165

220


CASA (Rs, nb) CASA (%) (RHS)

Incremental CASA Details

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Q4FY07

Q1FY08

Q2FY08

Q3FY08

Q4FY08

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Quarterly NIM (%)

4.2%

3.4% 3.4% 3.5%3.9%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%


Calculated NIM (%)

0%

25%

50%

75%

100%

Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11

Fees Recovery Trades MF Inc Others

Other Income(%)

0%

25%

50%

75%

100%


Processing Fees LC/LG Inc Remittance

Charges Misc Inc Exchange Inc

Core Fee Income(%)

Improvement in cost efficiency to continue

PNB has been able to curtail its cost to income (C/I) ratio from as high as ~51% in FY07 to ~41% in FY11. In FY10 however, the C/I ratio stood at ~39%. PNB has been able to reduce its operating expense to average assets from 2.2% in FY07 to 1.9% in FY11. In FY11, PNB had to provide a one-off expense on account of second pension liabilities for old employees to the extent of ~Rs.5.8 bn. If we remove this one-off expense, the C/I ratio would have been slightly better than FY10. However, PNB has huge hiring plans in FY12 and with new recruitment happening in, we expect PNB to improve its employee productivity in 6-9 months once the hiring is done. We expect the C/I ratio to reduce to ~39% by FY13E from ~41% registered in FY11.


Asset quality High restructured assets

PNB faced asset quality concerns in FY06-FY08 when its slippages were high and gross

non – performing assets (GNPA) was at ~2.78% in FY08. Although the bank has improved its performance drastically & brought down the GNPA level to 1.8% in FY11, we have concerns over the high restructured book and the exposure of the bank towards the commercial real estate business where the near future is a cause of concern. We have built in slightly conservative estimates for NPA going forward on account of the mentioned concerns. The restructured portfolio at the end of FY11 stood at Rs.150.22 bn, forming 6.2% of the advances. Slippage into NPA from the restructured book has been quite low in comparison to its peers for PNB. While PNB registered a slippage of ~11.5% of the restructured book, its peers have seen NPA slippage as high as 15% – 20% arising from

this book. The other cause of concern is the increase in slippages during FY11, where the slippages increased by ~52.8% y-o-y, there by increasing the GNPA by ~36.2% y-o-y. The increase in slippages was taken care by high recovery. However, this caused the GNPA to rise from 1.7% in FY10 to 1.8% in FY11. The net non – performing assets (NNPA) of the bank increased from 0.53% in FY10 to 0.84% in FY11. The credit cost for the bank increased by 30bps to ~0.8% in FY11. The main reason for increase in slippages was the default in agri loan and NPA from restructured accounts in Q4FY11.


45%42% 41%

32%

40%43% 42%

40%

0%

10%

20%

30%

40%

50%

Q1FY10Q2FY10Q3FY10Q4FY10Q1FY11Q2FY11Q3FY11Q4FY11

Cost to Income Ratio (%)

51% 47% 43% 39% 41% 40% 39%

2.2%2.0%

1.9%1.8%

1.9%1.7% 1.6%

0.0%

0.7%

1.4%

2.1%

2.8%

0%

15%

30%

45%

60%

FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Cost / Income Ratio (%) Opex / Avg Assets (%)

Operating Efficiency

0.0%

0.3%

0.6%

0.9%

0.0%

1.2%

2.4%

3.6%


Gross NPA (%) Net NPA (%) Credit Cost (%) (RHS)

Asset Quality

15.0%

11.5% 12.2%

17.0%

8.1%

4.5%6.2%

2.9%5.0%

3.8%

0%

5%

10%

15%

20%

0

80

160

240

320

400

SBI PNB BoB BoI CBK

Restructured Book NPA (%) (RHS) % of Adv (RHS)

Restructured Accounts

Amount (Rs, bn)

Healthy return ratios to continue

PNB has improved its return ratios in the last 3-4 years. The bank has improved its return on average assets (RoAA) from 1% in FY07 to 1.31% in FY11. It has also improved its return on equity (RoE) from ~15.6% in FY07 to 22.6% in FY11. Though the RoAA & RoE are relatively lower than FY10 in FY11, they are still on the higher side in the industry. We expect the healthy return ratios to continue on account of PNB’s growth in profits over the next couple of years due to healthy business growth and we expect the provision expenses to be lower than before. As mentioned earlier, we expect the margins to sustain at higher levels on account of sustainability of high CASA and focus towards the high yielding portfolios like MSME. This will help the bank in sustaining the NIMs ~3.5% by FY13E. We expect the growth in other income to contribute too. We expect the provisions to be lower in the next couple of years. Hence, we expect healthy growth in profits for the bank. We expect the RoAA of PNB to continue remain at ~1.3% by FY13E & RoAE to improve to 23% by FY13E.


Capital Adequacy Ratio

The Capital Adequacy Ratio (CAR) of the bank stood at 12.4% with Tier I at ~8.4% at the end of FY11. The government infused capital in the bank in Q4FY11 by Rs.1,840 mn to raise its equity stake in the bank to 58%. However, with the kind of growth that the bank is foreseeing, we expect the bank to raise capital through Tier II in the second half of the financial year. The profitability of the bank should also help it increase its CAR as we expect the growth in profits of the bank to improve in the coming years.


1.4%1.5% 1.6%

1.4% 1.4% 1.3% 1.3%

24.9% 26.0% 28.0%24.7%

23.4% 22.4%24.0%

0.0%

6.0%

12.0%

18.0%

24.0%

30.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Q2FY10Q3FY10Q4FY10Q1FY11Q2FY11Q3FY11Q4FY11

RoAA (%) RoAE (%) (RHS)

Return Ratios

1.1% 1.2%1.4%

1.3% 1.3% 1.3%

18.0%19.7%

24.1%22.6% 22.6% 23.0%

0.0%

6.0%

12.0%

18.0%

24.0%

30.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%


RoAA (%) RoAE (%) (RHS)

Return Ratios

14.7% 14.6% 14.2% 13.8%12.6% 11.9% 12.4%

9.4% 9.3% 9.1% 8.7% 8.0% 7.6%8.4%

0.0%

5.0%

10.0%

15.0%

20.0%


CAR (%) Tier I (%)


13.0%14.0% 14.2%

12.4% 12.3%11.3%

8.5% 9.0% 9.1% 8.4% 8.4% 8.2%

0.0%

5.0%

10.0%

15.0%

20.0%


CAR (%) Tier I (%)


Financial Performance

PNB had a healthy business growth of ~23.8% (CAGR) between FY07 to FY11. During that period, the bank improved its CD ratio therby enabling it to earn higher core interest income and the sustainability of CASA at higher levels which helped it to sustain margins at higher levels. The advances of the bank grew by a healthy CAGR of 25.8% as against the deposit CAGR of 22.3% between FY07 to FY11. We expect the business of PNB to grow at a CAGR of 21% till FY13E. PNB’s interest income from advances grew at a robust CAGR of 28.9% from FY07 to FY10. This was mainly on account of improvement in CD ratio from 69% in FY07 to 77.4% in FY11 and with the focus on high yielding portfolios like MSME and large industry. While the income from investments grew at a CAGR of ~12% between FY07 to FY11. Overall, the interest income of the bank grew at a CAGR of ~24% between FY07 to FY11. Net interest income (NII) of the bank grew at a healthy CAGR of 21% between FY07 to FY11. With the sustainability of CASA at ~40% levels, we expect the net interest income (NII) to register a CAGR of ~16% from FY11 to FY13E. We expect NII to grow from Rs.118 bn in FY11 to Rs.159 bn in FY13E. With the operating cost moderating due to the one-off expense made in FY11, we expect the pre-provisioning profit (PPP) to grow at a CAGR of ~19% between FY11 to FY13E. Going forward, we expect the credit cost to slow down. Hence, we expect the net profit to show a healthy CAGR of ~23% from FY11 to FY13E.


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50

100

150

200


NII, (Rs,bn) PPP, (Rs,bn) PAT, (Rs,bn)


0

10

20

30

40


NII (Rs, bn) PPP (Rs, bn) PAT (Rs, bn)


Peer Comparison NIM is the highest amongst peers CASA ratio is on the higher side Asset quality of PNB PNB is attractively priced

We have taken State Bank of India (SBI), Bank of Baroda (BoB) and Canara Bank (CBK) for peer comparison to PNB. We have measured them on various parameters like CD ratio, NIM, return ratios, NPA’s etc., based on their FY11 results. PNB’s NIM at 3.96% is the highest in comparison to 3.32% of SBI and 3.12% each of BoB & CBK. PNB’s return ratios are also one of the best amongst peers with RoA at 1.34% in comparison to 0.71% of SBI and RoNW at 22.1% in comparison to 12.8% of SBI & 21.5% of BoB. PNB’s CASA ratio at 39.2% is next best to SBI’s 48.7% and better then 28.7% of BoB & 30.3% of CBK. The C/I ratio of the bank is also one of the best amongst peers at 41.3% in comparison to 47.6% of SBI. The asset quality of PNB is also one amongst the best in the peers with NNPA at 0.85% in comparison to 1.63% of SBI and 1.11% of CBK. Slippage into NPA from the restructured book is at 11.5% which is lower than SBI’s

15%. Currently, PNB is attractively priced in comparison to its peers. PNB with high CASA ratio, best NIM, healthy C/I ratio, asset quality & healthy return ratios is available at a P/BV of 1.16x of FY13E in comparison to P/BV of 1.38x of SBI & 1.2x of BoB.

Source: Company, Bloomberg, W2W Research

Particulars (FY11) PNB SBI BoB CBK

CD Ratio (%) 77.4 82.6 74.9 72.3

NIM (%) 4.0 3.3 3.1 3.1

RoA (%) 1.3 0.7 1.3 1.4

RONW (%) 22.1 12.8 21.5 28.3

CAR (%) 12.4 12.0 14.5 15.4

CASA (%) 39.2 48.7 28.7 30.3

Cost to Income Ratio (%) 41.3 47.6 39.9 42.0

Provision Coverage Ratio (%) 73.2 65.0 85.0 73.0

GNPA (%) 1.8 3.3 1.4 1.5

NNPA (%) 0.9 1.6 0.4 1.1

Restructured Book (Rs, bn) 150.2 343.5 67.1 80.8

Slippage into NPA (Rs, bn) 17.3 51.4 8.2 6.6

NPA from Restructured Book (%) 11.5 15.0 12.2 8.1

CMP (Rs.) 1,117 2,400 871 510

P/BV (FY13E) (x) 1.2 1.4 1.2 0.9

BV (FY13E) (Rs.) 963 1,744 727 596

Investment Concern High restructured book

The restructured book of PNB is on a higher side. Although management has guided that slippages into NPA from this book seems to have peaked, the high level of restructured book is a cause of concern for sustaining the asset quality.

Large industry exposure

Loans to large industrial houses have increased at a CAGR of 31.2% from FY08 to FY11 and the share of this segment in advance portfolio has increased from 31% in FY08 to 38% in FY11. However, any economic slowdown would affect the loan book in this segment.

Valuation Healthy CASA share coupled with high NIMs

CASA share for PNB has always been on the higher side in the industry & we expect the same to continue for the next couple of years. NIM of the bank for FY11 was at ~3.9%,

which we expect to moderate at ~3.5% in the next couple of years, but this moderation is in line with the industry. Even then, NIM of PNB will be one on the higher side in the industry.

Growth in profits expected due to better income & lower provisions

The profits in FY11 were lower due to one-off expenses and other provisions. However, we expect the growth rate in profits to be healthy in FY12 given PNB’s healthy business growth coupled with lower provisions. We expect the healthy return ratios to continue for the next couple of years. We expect PAT to grow at a CAGR of ~23% between FY11 to FY13E.

Stock has corrected on account of various reasons

PNB’s stock price has fallen in the recent times owing to the concern in the bank with

respect to NIM and asset quality. We believe that NIM concern isn’t a threat to the bank on account of healthy CASA share coupled with active rate hikes on lending side as & when deposit side rates were hiked. This hike in lending rates will safeguard the margins to a certain extent. We believe that the asset quality concern has now been factored in the price of the stock.

Currently, PNB is available at a P/ABV of 1.23x of FY13E

Currently at Rs.1,117, the stock is available at price to adj book value (P/ABV) of 1.23x of FY13E. We expect healthy growth in the business of the bank coupled with high CASA franchisee. We expect the NIM to be on the higher side in the industry and healthy return ratios to continue. We believe that the recent correction in the market has made the stock attractive for investment. Hence, we value the bank’s business at 1.48x FY13E P/ABV and initiate coverage on the stock with a price target of Rs.1,350 which is an upside of ~21% from the current market price.

Average one year forward P/BV at 1.48x

Source: W2W Research

0.00

0.50

1.00

1.50

2.00

2.50

Mar-06

Jun-06

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Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

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Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

P/BV Avg P/BV

(x)

Company Background Founded in 1994 PNB was incorporated in the year 1895 and is a Delhi based bank. Majority of the

business of PNB comes in from the northern states like Punjab, Delhi, Haryana, Uttar Pradesh, etc. PNB is the second largest bank in terms of business size & branches. As on Mar ’11, PNB’s business stood at Rs.5,550 bn and it had a branch network of 5,189 branches.

Subsidiaries & JVs Punjab National Bank (International) Ltd PNB Gilts Ltd PNB Housing Finance Ltd PNB Investment Services Ltd Other Subs Joint Ventures Druk PNB Bank Ltd

Punjab National Bank (International) Limited (PNBIL) is a wholly owned UK subsidiary of Punjab National Bank, India. PNBIL was incorporated in UK on 13th April 2006 and registered with the Companies House in England & Wales. PNB Gilts Ltd is engaged in the business of trading in govt securities, treasury bills and non SLR Investments. It is also engaged in dealing in money market instruments (Call/Notice/Term Money, Repo /Reverse Repo, Inter-corporate Deposits, Commercial Paper, Certificate of Deposit) and mutual funds distribution. It is listed at NSE & BSE.

PNB Housing Finance Ltd is engaged in providing housing loans for purchase, construction and upgradation of a dwelling unit. It offers loans for construction or for purchase of house/flat from development authorities and also from private builders/ group housing societies as well as for renovation/ repairs. They also provide finance for construction of residential projects. PNB Investment Services Ltd has been set up by PNB for carrying out merchant banking business. It provides services for project appraisal, loan syndication, debt placement and to executes IPOs/FPO/QIPs. Other subsidiaries of PNB are PNB Insurance Broking Pvt Ltd & PNB Life Insurance Co.

Ltd. PNB has the following Joint Ventures: 1. Principal PNB Asset Management Company Pvt. Ltd 2. Principal Trustee Company Pvt. Ltd 3. Assets Care Enterprises Ltd. 4. India Factoring & Finance Solutions Pvt. Ltd. Druk PNB Bank Ltd is a Joint Venture Subsidiary in Bhutan with PNB’s equity participation to the extent of 51%. It started operations on 27th January, 2010 and has three branches- one each at Thimphu, Phentsholing & Wangduephodrang.

International Presence

PNB has opened one branch each at Kabul and Dubai, two branches at Hong Kong and an Off Shore Banking Unit at Mumbai. PNB has representative offices at Almaty, Dubai, Shanghai and Oslo, a wholly owned subsidiary in UK with 7 branches and a subsidiary each in Kazakhstan & Bhutan, (Druk PNB Bank Ltd.) and joint venture with Everest Bank Ltd. Nepal. PNB has acquired majority equity stake of 63.64% in Dana Bank of Kazakhstan. PNB

intends to open a representative office in Australia and plans to set up a 100% subsidiary in Canada.

Financial Statements

Income Statement

Rs,mn FY09 FY10 FY11 FY12E FY13E

Interest Earned 191,272 214,669 269,865 344,197 406,112

Interest Expended 122,953 129,440 151,791 211,254 247,063

Net Interest Income 68,319 85,229 118,073 132,943 159,049

Other Income 30,647 35,653 36,126 44,766 50,359

Net Income 98,966 120,882 154,199 177,709 209,408

Operating Expenses 42,062 47,619 63,642 70,540 81,657

Operating Profit 56,904 73,263 90,557 107,169 127,751

Provisions 13,562 14,215 24,920 26,939 28,036

Profit Before Tax 43,342 59,048 65,637 80,229 99,716

Tax 16,760 19,994 21,302 26,476 32,906

Profit After Tax 26,582 39,054 44,335 53,754 66,809

Balance Sheet

Rs,mn FY09 FY10 FY11 FY12E FY13E

Equity Share Capital 3,153 3,153 3,168 3,168 3,168

Reserves & Surplus 143,383 174,076 211,917 257,751 316,640

Net Worth 146,536 177,229 215,086 260,919 319,808

Deposits 2,097,605 2,493,298 3,128,987 3,754,785 4,580,837

Borrowings 124,597 192,624 315,897 366,440 415,910

Other Liabilities 100,448 103,177 123,283 147,957 170,196

Total Liabilities 2,469,186 2,966,328 3,783,252 4,530,101 5,486,751

Investments 633,852 777,245 951,623 1,114,150 1,348,261

Advances 1,547,030 1,866,012 2,421,067 2,928,732 3,527,245

Other Assets 288,304 323,071 410,562 487,220 611,245

Total Assets 2,469,186 2,966,328 3,783,252 4,530,101 5,486,751

Particulars (%) FY09 FY10 FY11 FY12E FY13E

Growth Matrix

Deposits 26.0% 18.9% 25.5% 20.0% 22.0%

Advances 29.5% 20.6% 29.7% 21.0% 20.4%

Total Business 27.5% 19.6% 27.3% 20.4% 21.3%

NII 23.4% 24.8% 38.5% 12.6% 19.6%

Operating Expenses 19.3% 13.2% 33.6% 10.8% 15.8%

Operating Profit 42.0% 28.7% 23.6% 18.3% 19.2%

Provisions 90.9% 4.8% 75.3% 8.1% 4.1%

Profit After Tax 29.7% 46.9% 13.5% 21.2% 24.3%

Ratios

NIM 3.4% 3.5% 3.9% 3.5% 3.5%

Cost to Income 42.5% 39.4% 41.3% 39.7% 39.0%

ROAA 1.2% 1.4% 1.3% 1.3% 1.3%

ROAE 19.7% 24.1% 22.6% 22.6% 23.0%

Pre-Prov ROAA 2.6% 2.7% 2.7% 2.6% 2.6%

Pre-Prov ROAE 47.6% 49.9% 49.9% 48.0% 46.3%

Gross NPA 1.6% 1.7% 1.8% 1.9% 1.9%

Net NPA 0.2% 0.5% 0.8% 0.6% 0.6%

CAR 14.0% 14.2% 12.4% 12.3% 11.3%

Tier I 9.0% 9.1% 8.4% 8.4% 8.2%

BV (Rs.) 416 514 632 777 963

P/BV (x) 2.7 2.2 1.8 1.4 1.2

Adj BV (Rs.) 396 489 597 733 911

P/ABV (x) 2.8 2.3 1.9 1.5 1.2

Key Ratios

Du Pont Analysis

Particulars (%) FY09 FY10 FY11 FY12E FY 13E

Interest Earned 8.6% 7.9% 8.0% 8.3% 8.1%

Interest Expended 5.5% 4.8% 4.5% 5.1% 4.9%

NII 3.1% 3.1% 3.5% 3.2% 3.2%

Other Income 1.4% 1.3% 1.1% 1.1% 1.0%

Net Income 4.4% 4.4% 4.6% 4.3% 4.2%

Operating Expenses 1.9% 1.8% 1.9% 1.7% 1.6%

Operating Profit 2.6% 2.7% 2.7% 2.6% 2.6%

Provisions 0.6% 0.5% 0.7% 0.6% 0.6%

Profit Before Tax 1.9% 2.2% 1.9% 1.9% 2.0%

Tax 0.8% 0.7% 0.6% 0.6% 0.7%

PAT (ROA) 1.2% 1.4% 1.3% 1.3% 1.3%

Leverage 18.6 16.8 17.2 17.5 17.2

RoAE 22.2% 24.1% 22.6% 22.6% 23.0%

RESEARCH TEAM

K.N.Rahaman Deputy Research Head Equities & Commodities [email protected]

Jigisha Jaini Sr. Research Analyst Capital Goods & Engineering [email protected]

Nisha Harchekar

Sr. Research Analyst

FMCG, Hotels, Media

[email protected]

Sejal Jhunjhunwala Sr. Research Analyst Auto, Shipping & Metals [email protected]

Abhishek Kothari Research Analyst Banks, NBFC & Financial Services [email protected]

Krishna Reddy Research Analyst Commodities, Economic Update [email protected]

MSR Prasad Research Analyst Commodities [email protected]

Ritu Gupta Research Analyst Mutual Funds [email protected]

Aditya Agarwal Sr. Derivative Analyst Derivative Strategist & Technicals [email protected]

Arun Kumar Technical Analyst Technical Analysis [email protected]

Ashwini Manwatkar Research Associate [email protected]

Contact

022-40192900

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Disclosure of Interest Statement in Punjab National Bank as on 13th July, 2011:

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Punjab National Bank - Moneycontrol

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