punjab national bank q1fy15: buy for a target of rs1375

26 July 2014

1QFY15 Results Update | Sector: Financials

Punjab National Bank

Alpesh Mehta ([email protected]); +91 22 3982 5415

Sohail Halai ([email protected]); +91 22 39825430

BSE SENSEX S&P CNX CMP: INR923 TP: INR1,375 Buy 26,127 7,790

Bloomberg PNB IN

Equity Shares (m) 362.1

M.Cap. (INR b) / (USD b) 334.2/5.6

52-Week Range (INR) 1,068/402

1, 6, 12 Rel. Per (%) -8/35/15

Financials & Valuation (INR Billion)

Y/E Mar 2015E 2016E 2017E

NII 181.1 208.3 244.2

OP 128.2 152.0 184.1

NP 55.4 66.6 83.0

EPS (INR) 153.0 184.0 229.3

EPS Gr. (%) 65.7 20.3 24.6

BV/Share 1,086.4 1,248.9 1,451.5

P/E (x) 6.0 5.0 4.0

P/BV (x) 0.8 0.7 0.6

RoE (%) 15.0 15.8 17.0

ROA (%) 1.0 1.0 1.1

PNB’s 1QFY15 PAT grew 10% YoY to INR14.1b (24% above estimates). Improved performance of asset quality (GNPA and NNPA stable QoQ) led to improvement in NIMs (+22bp QoQ to 3.4%). While PPP was 5% above estimates, PAT outperformance was driven by MTM write-back of INR3.8b.

Gross slippages came in at INR29.6b (of which INR16.8b slipped from already restructured loan) v/s INR44.5b in 4QFY14.

Fresh restructuring was lower at INR14.5b (INR31.6b in 4QFY14) and further disbursements to existing restructured loan were INR9b. Led by repayment/slippages/upgrades, standard restructured loan came down 4% QoQ to INR340b (9.8% of loans). Resultantly, net stress addition (net slippages + change in standard restructured loan) came in at INR4.5b v/s INR66.1b in 4QFY14.

Other highlights: (1) loan portfolio was flat QoQ (+14% YoY), (2) SA deposit growth moderated to 11% YoY (declined 4% QoQ) and domestic CASA ratio declined QoQ to 39.9% v/s 41.3% in FY14 and (3) fee income growth moderated to 11% YoY.

Maintain Buy: Loan portfolio is highly levered to resolution of policy bottlenecks and improvement in economic growth. 57% of restructured loans belong to Infra and Iron and steel and kick start in these segments could allay concerns. Balance sheet consolidation helped PNB to structurally improve the liability profile and maintain NIM, despite high asset quality strain – which is a positive. With focus on profitable growth, healthy core parameters, CET1 of ~8.8% PNB remains one of our top picks. We have upgraded estimates by 20%+ to factor in lower provisions and better margins. PNB likely to be one of the first PSU bank to come back to 1%+ RoA in this cycle. Buy

Investors are advised to refer through disclosures made at the end of the Research Report.

26 July 2014 2


Quarterly Performance: Actual v/s estimates (INR m) Y/E MARCH 1QFY15A 1QFY15E Var. (%) Comments

Net Interest Income 43,797 42,736 2 Better than expected NIM performance compensated for lower than expected loan growth % Change (Y-o-Y) 12 9

Other Income 12,364 12,489 -1 Fees in-line with expectation

Net Income 56,161 55,225 2

Operating Expenses 24,908 25,334 -2 Low AS 15 related provisioning

Operating Profit 31,253 29,891 5

% Change (Y-o-Y) 5 1

Other Provisions 9,276 13,758 -33 MTM write-back helped; credit cost elevated at 1.6% partially on account of prudent provisioning of INR4b to improve PCR

Profit before Tax 21,977 16,133 36 Tax Provisions 7,926 4,840 64 Tax rate higher than expected rate at 36% (exp of 30%)

Net Profit 14,051 11,293 24

% Change (Y-o-Y) 10 -11

Source: MOSL, Company

Net stress addition significantly lower QoQ Gross slippages during the quarter declined from INR44.5b in 4QFY14 to

INR29.6b (annualized slippage ratio of 3.9%). Of this, INR16.8b came in from loans which were already restructured.

Upgrades and recoveries moderated to INR10.1b as compared to INR20.6b in 4QFY14. Hence, net slippages for the quarter came in at INR19.4b v/s INR23.9b in 4QFY14.

During the quarter bank wrote-off INR12.2b (INR990m in 4QFY14) and resultantly, GNPA in absolute terms increased 4% QoQ. In percentage terms GNPA and NNPA was at 5.4% (5.3% in FY14) and 3% (2.9% in FY14). PCR remained largely steady QoQ to 46.6% (60% - including technical write-off).

Led by slippage/ upgrades/repayment, outstanding standard restructured loan portfolio declined 4% QoQ and was at INR340b (9.8% of loans). Hence net stress addition declined QoQ to INR4.5b (INR66.1bb in 4QFY14) and net stress loans declined to 12.8% compared to 13.1% in FY14.

NIMs better than estimates – driven by lower interest income reversals NIM for the quarter came in at 3.4% (+20bp QoQ) v/s expectation of 10bp

improvement QoQ. Thus even as loan growth came in below estimates NII were marginally above expectation at INR43.8b.

Improvement in NIMs was driven by 34bp QoQ improvement in yield on loans (as interest income reversals were lower during the quarter). Cost of funds were contained as it increased just 3bp QoQ and stood at 5.1%.

Moderate business growth; expect ~15% for FY15 Loan and deposits growth was moderate at 14% YoY (flat QoQ) and 12% YoY

(down 1.5% QoQ) respectively. Growth in infrastructure financing moderated to 8% YoY (+3% QoQ) which was

led by slowdown in power segment (+3% QoQ and 8% YoY – as compared to 31% YoY in 1QFY14). Growth in construction segment was strong at 8% QoQ and 33% YoY, however formed just 0.7% of overall loans.

26 July 2014 3


Agriculture loans declined 8% QoQ, however was strong at 32% YoY. Similarly retail loans was flat QoQ but increased 22% YoY driven by healthy growth of 4% QoQ and 20% YoY in housing segment.

CASA growth moderated to 9% YoY (declined 5%+ QoQ) led by flat CA deposits YoY (declined 14% QoQ) and moderation in SA deposits (+11% YoY, but declined 3%+ QoQ). Resultantly CASA ratio dipped to 39.9% as compared to 41.3% in FY14.

Conference Call highlights

Asset quality: Slippages from restructured loan rise; management confident of worst of the slippages behind Of the slippages during the quarter, INR16.8b came in from slippages in the

restructured loan. Slippages from INR100m and above were at INR19.8b of which 7 accounts were

above INR10m (one large account of INR4.3b). Bank does not have significant pipeline of restructuring.

Bank utilized INR4b to provide for NPA and keep PCR stable, despite net slippages being at an elevated level.

During the quarter: (1) fresh restructuring was INR14.5b and addition to already existing restructured loan was INR9b. Further deduction from restructured loan consisted of (1) INR16.8b, (2) INR15.4b of upgrades and (3) INR6.3b of loans which now cease to attract provisions.

Cumulative restructured loan till date would have been INR550b. Break up of NPA: (1) Agriculture INR22.1b - 4.46% of agricultural loans (2)

MSME - INR44.5b 8.66% of MSME loans (3) retail INR5.1b (1.56% of retail loans). Iron and steel INR2.1b and textile INR7.6b (9.62% of the textiles portfolio).

NIM guidance of 3.2-3.3% - conservative Guides for NIMs of 3.25-3.3% as bank would look an opportunity to AAA rated

corporate. Average cost of term deposits has come down to 7.6% as compared to 8.14% in

1QFY14. Average YoY growth of: (1) CA deposits – 6.2%, (2) SA deposits – 13.2%, term

deposits – 13.4% and (4) differential deposits declined 40%+

Other highlights Exchange gains have come down YoY on account of lower volatility in INR and

moderation in imports. Provisions of INR500m on un-hedged forex exposure NBFC funding increased QoQ on account of disbursement to AAA/AA rated

companies. Bank has not decided on raising money through equity but can headroom

available to raise capital is of INR50b. Transformation activities over 2.5 years to improve delivery channels and bank

would soon be launching mobile banking. Average transaction time has come down from 30 minutes to 13 minutes which will create larger capacity building within the branches.

26 July 2014 4


Valuation and view Net stress addition has come down significantly QoQ and PNB remains highly

levered to resolution of policy bottlenecks and improvement in economic growth. NSL (ex SEB and AI) at 10.3% remains significantly higher than industry however, 57% of RL belong to Infrastructure and Iron and steel and kick start in these segments could allay concerns.

Balance sheet consolidation helped PNB to structurally improve the liability profile and maintain NIM, despite high asset quality strain and volatility in interest rate – which is a positive.

Despite factoring in high credit cost of 1.3%, FY15 PAT is expected to grow 66% YoY as one large account write off, high net slippages and MTM provisions marred FY14 earnings.

Capitalization (CET1 of ~8.8%) is relatively better as compared to other PSBs and earnings to be strong (CAGR of 37% over FY14.17).

We expect ROA to remain healthy at 1%+ and ROE to improve gradually to ~17% by FY17. PNB trades at 0.8x/0.7x FY15/16 BV of INR1,086/1,249. Buy with a target price of INR1,375 (1.1x FY16 BV).

Strong earnings upgrade led by lower provisions

INR B Old Estimate Revised Estimate Chg. (%)

FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17 Net Interest Income 175.6 209.4 245.1 181.1 208.3 244.2 3.1 -0.5 -0.4 Other Income 50.7 55.7 61.1 50.4 58.3 67.0 -0.6 4.7 9.6 Total Income 226.3 265.1 306.2 231.6 266.5 311.2 2.3 0.6 1.6 Operating Expenses 104.1 116.2 129.9 103.4 114.6 127.1 -0.7 -1.4 -2.1 Operating Profits 122.3 148.9 176.4 128.2 152.0 184.1 4.9 2.1 4.4 Provisions 60.8 67.2 80.5 45.5 52.6 60.2 -25.1 -21.8 -25.2 PBT 61.5 81.7 95.8 82.7 99.4 123.9 34.5 21.7 29.3 Tax 18.4 24.5 28.8 27.3 32.8 40.9 47.9 33.9 42.2 PAT 43.0 57.2 67.1 55.4 66.6 83.0 28.7 16.5 23.7 Margins (%) 3.18 3.28 3.25 3.33 3.35 3.35 Credit Cost (%) 1.25 1.05 1.05 1.25 1.05 1.00 RoA (%) 0.73 0.84 0.84 0.95 1.00 1.07 RoE (%) 11.8 14.0 14.5 15.0 15.8 17.0

Source: MOSL, Company One year forward P/BV


One year forward P/E


26 July 2014 5


DuPont Analysis: Highly levered to macro-economic conditions – expect RoA to improve (%) FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E Net Interest Income 3.26 3.39 3.06 3.06 3.12 3.50 3.21 3.17 3.14 3.12 3.14 3.15 Fee income 0.58 0.66 0.64 0.64 0.68 0.65 0.61 0.53 0.54 0.53 0.54 0.53

Fee to core income 15.13 16.23 17.36 17.25 17.93 15.72 16.09 14.40 14.61 14.64 14.64 14.40 Core Operating Income 3.84 4.05 3.71 3.70 3.80 4.15 3.82 3.70 3.67 3.65 3.68 3.68 Operating Expenses 2.23 2.16 1.95 1.89 1.75 1.89 1.67 1.74 1.81 1.78 1.73 1.64

Cost to Core Income Ratio 58.05 53.45 52.64 50.95 46.09 45.43 43.81 47.07 49.39 48.71 46.95 44.56 Employees 1.56 1.53 1.36 1.31 1.15 1.32 1.13 1.21 1.26 1.23 1.19 1.12

Emp cost to Opex (%) 69.96 70.72 69.82 69.53 65.54 70.10 67.45 69.50 69.72 69.22 68.76 68.33 Others 0.67 0.63 0.59 0.57 0.60 0.56 0.54 0.53 0.55 0.55 0.54 0.52

Core operating Profits 1.61 1.88 1.75 1.82 2.05 2.27 2.15 1.96 1.86 1.87 1.95 2.04 Trading and others 0.54 0.47 0.46 0.74 0.65 0.42 0.39 0.37 0.35 0.33 0.34 0.33 Operating Profits 2.15 2.35 2.22 2.55 2.70 2.68 2.54 2.33 2.21 2.21 2.29 2.38 Provisions 0.65 0.94 0.39 0.41 0.52 0.74 0.86 0.94 1.30 0.78 0.79 0.78

NPA 0.05 0.39 0.21 0.37 0.37 0.59 0.57 0.71 0.88 0.81 0.69 0.67 Othes 0.60 0.55 0.18 0.05 0.16 0.14 0.28 0.22 0.42 -0.02 0.10 0.11

PBT 1.50 1.41 1.82 2.14 2.17 1.94 1.68 1.39 0.91 1.42 1.50 1.60 Tax 0.44 0.41 0.69 0.75 0.74 0.63 0.51 0.38 0.26 0.47 0.49 0.53

Tax Rate 29.27 29.00 37.84 35.16 33.86 32.45 30.59 27.20 28.74 33.00 33.00 33.00 RoA 1.06 1.00 1.13 1.39 1.44 1.31 1.17 1.01 0.65 0.95 1.00 1.07 Leverage (x) 16.04 16.01 17.27 18.64 18.54 18.64 18.03 16.26 15.67 15.75 15.68 15.85 RoE 17.01 16.03 19.58 25.84 26.64 24.49 21.05 16.48 10.18 15.01 15.76 16.98


DuPont Analysis: Core operating profits have stabilized at ~2% over last few quarters Y/E MARCH 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15

Net Interest Income 3.22 3.13 3.17 3.18 3.26 3.29 3.32 2.99 3.19 Fee income 0.64 0.50 0.50 0.50 0.62 0.48 0.54 0.56 0.60

Fee to core income (%) 16.56 13.70 13.65 13.65 16.07 12.74 13.88 15.75 15.92 Core Income 3.86 3.63 3.67 3.69 3.88 3.77 3.86 3.54 3.80 Operating Expenses 1.76 1.74 1.72 1.77 1.90 1.95 1.93 1.66 1.82

Cost to Core Income (%) 45.64 47.84 46.78 48.04 48.88 51.72 50.13 46.85 47.82 Employee cost 1.24 1.23 1.20 1.20 1.35 1.36 1.38 1.10 1.29

Emp cost to Opex (%) 70.27 70.54 69.61 67.65 71.01 69.69 71.55 66.41 70.96 Others 0.52 0.51 0.52 0.57 0.55 0.59 0.55 0.56 0.53

Core operating Profits 2.10 1.89 1.95 1.92 1.98 1.82 1.92 1.88 1.98 Trading and others 0.38 0.28 0.32 0.49 0.49 0.26 0.20 0.48 0.30 Operating Profits 2.48 2.18 2.28 2.40 2.48 2.08 2.13 2.37 2.28 Provisions 0.90 0.92 0.68 1.25 0.89 1.56 1.25 1.60 0.68

NPAs 0.78 0.98 0.40 0.70 0.56 0.82 0.85 1.31 1.00 Others 0.12 -0.06 0.29 0.55 0.33 0.73 0.40 0.29 -0.32

PBT 1.58 1.25 1.60 1.16 1.59 0.52 0.88 0.77 1.60 Tax 0.49 0.34 0.49 0.21 0.53 0.11 0.28 0.17 0.58

Tax Rate (%) 31.12 26.97 30.56 17.70 33.14 20.53 32.09 22.07 36.06 RoA 1.09 0.92 1.11 0.95 1.06 0.41 0.59 0.60 1.02


26 July 2014 6


Story in charts

Loan growth picks up post consolidation phase

2,42

9

2,49

0

2,62

6

2,93

8

2,94

5

2,94

7

2,97

3

3,08

8

3,05

1

3,13

9

3,26

1

3,49

3

3,47

5

2319 19 21 21

1813

5 4 6 10 13 14

1QFY

12

1HFY

12

9MFY

12

FY12

1QFY

13

1HFY

13

9MFY

13

FY13

1QFY

14

1HFY

14

9MFY

14

FY14

1QFY

15

Loans (INR b) YoY Gr. (%)

Source: Company, MOSL

… however deposits growth remains muted

3,24

1

3,41

8

3,56

5

3,79

6

3,85

4

4,00

7

3,85

8

3,91

6

3,96

8

4,05

7

4,20

6

4,51

4

4,44

9

27 25 23 21 19 17

83 3 1

915 12

1QFY

12

1HFY

12

9MFY

12

FY12

1QFY

13

1HFY

13

9MFY

13

FY13

1QFY

14

1HFY

14

9MFY

14

FY14

1QFY

15

Deposits (INR b) YoY Growth (%)


CASA ratio remains declines QoQ (%)

37.4

36.3

35.3

35.3

34.6 35

.8 36.9

39.2

37.8

38.5

38.3

38.3

36.8

1QFY

12

1HFY

12

9MFY

12

FY12

1QFY

13

1HFY

13

9MFY

13

FY13

1QFY

14

1HFY

14

9MFY

14

FY14

1QFY

15


Bulk deposits proportion increased QoQ

24.0

23.7

24.0

23.3

22.2

20.8

15.3

12.5

8.8 9.4

8.0 8.5 9.3

1QFY

12

1HFY

12

9MFY

12

FY12

1QFY

13

1HFY

13

9MFY

13

FY13

1QFY

14

1HFY

14

9MFY

14

FY14

1QFY

15


CD ratio near optimum level (%)

75

7374

7776

74

7779

77 77 78 7778

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15


NIM improved QoQ led by lower interest inc. reversals (%)

3.8 4.

0

3.9

3.5 3.

6

3.5

3.5 3.5

3.5

3.5 3.

6

3.2

3.4

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15


26 July 2014 7


Story in charts

CoD increases marginally led by decline in CASA ratio

11.4

11.9

12.0

11.4

11.5

11.1

10.9

10.7

10.5

10.4

10.6

9.9

10.3

6.3

6.5 6.

7

6.8

7.0

6.9

6.8 6.6

6.4

6.4

6.3

6.1

6.1

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

Yield on Loans (%) Cost of Deposits (%)


Fee income growth moderated at 11% YoY

6.7

5.5 6.

2 7.1 7.3

5.8

5.9

6.0

7.5

5.9 6.

8 7.5 8.3

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15


Cost to core income ratio increased marginally (%)

43 43 42 39

43 46 45 46 47

50 49 45 46

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15


With stable asset quality credit cost improves (%)

0.9

0.5

0.9

1.4

1.2

1.5

0.6

1.1

0.9

1.3 1.4

2.1

1.6

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15


Net slippages declined led by higher write-offs QoQ

5.3

2.7

13.2

23.4

13.0

40.5

0.1

3.7

24.2

15.1

4.5

23.9

19.5

1.1 0.52.4

3.92.1

6.5

0.0 0.5

3.32.0

0.6

3.1 2.6

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

Net Slippages (INR b) Net Slipapge Ratio (%)


GNPA in absolute increased 4% QoQ; PCR stable QoQ

2.0

2.1

2.4

2.9

3.3

4.7

4.6

4.3

4.8

5.1

5.0

5.3

5.4

0.9

0.8

1.1

1.5

1.7

2.7

2.6

2.4

3.0

3.1

2.8

2.9

3.0

57 59 5549 51

44 46 4640 42 45 47 47

1QFY

12

1HFY

12

9MFY

12

FY12

1QFY

13

1HFY

13

9MFY

13

FY13

1QFY

14

1HFY

14

9MFY

14

FY14

1QFY

15

GNPA (%) NNPA (%) PCR (cal %)


26 July 2014 8


Quarterly Snapshot FY13 FY14 FY15 Variation (%) INR m 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q QoQ YoY Profit and Loss Net Interest Income 36,931 36,476 37,318 37,765 39,075 40,155 42,211 40,018 43,797 9 12 Other Income 11,680 9,072 9,720 11,762 13,421 8,993 9,384 13,969 12,364 -11 -8

Trading profits 880 590 730 2,670 2,840 530 240 1,890 1,490 -21 -48 Forex Income 2,120 1,280 1,140 1,280 1,620 1,610 1,070 1,140 970 -15 -40 Recoveries 870 600 1,450 1,300 850 690 860 2,740 910 -67 7 Div. from Liquid MF 480 810 500 540 630 300 410 720 700 -3 11 Core Fees 7,330 5,792 5,900 5,972 7,481 5,863 6,804 7,479 8,294 11 11

Total Income 48,611 45,548 47,038 49,527 52,496 49,149 51,596 53,987 56,161 4 7 Operating Expenses 20,203 20,219 20,219 21,010 22,758 23,800 24,572 22,253 24,908 12 9

Employee 14,197 14,263 14,075 14,213 16,159 16,587 17,580 14,778 17,674 20 9 Others 6,005 5,956 6,145 6,797 6,598 7,213 6,991 7,475 7,235 -3 10

Operating Profits 28,409 25,329 26,819 28,517 29,738 25,348 27,024 31,734 31,253 -2 5 Provisions 10,325 10,738 8,016 14,777 10,665 18,987 15,900 21,387 9,276 -57 -13

NPA provisions 9,000 11,400 4,660 8,300 6,750 10,050 10,830 17,550 13,660 -22 102 Provisions on Invst. -1,050 -140 320 1,900 920 4,430 2,190 280 -3,810 -1,461 -514 Others 2,375 -522 3,036 4,577 2,995 4,507 2,880 3,557 -574 -116 -119

PBT 18,084 14,590 18,803 13,740 19,073 6,361 11,123 10,347 21,977 112 15 Taxes 5,627 3,935 5,747 2,432 6,320 1,306 3,569 2,284 7,926 247 25 PAT 12,457 10,656 13,056 11,308 12,753 5,055 7,554 8,064 14,051 74 10 Ratios (%) Fees to Total Income 15.1 12.7 12.5 12.1 14.2 11.9 13.2 13.9 14.8 Cost to Core Income 45.6 47.8 46.8 48.0 48.9 51.7 50.1 46.9 47.8 Tax Rate 31.1 27.0 30.6 17.7 33.1 20.5 32.1 22.1 36.1 CASA (Cal) 34.6 35.8 36.9 39.2 37.8 38.5 38.3 38.3 36.8 Loan/Deposit 76.4 73.5 77.1 78.9 76.9 77.4 77.5 77.4 78.1 Yield, cost movement (%) Yield on loans 11.5 11.1 10.9 10.7 10.5 10.4 10.6 9.9 10.3 34 -22 Yield On Investments 7.9 7.9 7.9 7.9 7.8 7.9 7.8 7.9 8.0 7 18 Yield on Funds 9.1 8.9 8.8 8.5 8.5 8.4 8.4 8.0 8.3 27 -20 Cost of Deposits 7.0 6.9 6.8 6.6 6.4 6.4 6.3 6.1 6.1 -3 -31 Cost of Funds 5.9 5.8 5.7 5.4 5.3 5.3 5.2 5.1 5.1 3 -14 Spreads 3.2 3.1 3.1 3.1 3.2 3.2 3.2 2.9 3.1 24 -6 Margins 3.6 3.5 3.5 3.5 3.5 3.5 3.6 3.2 3.4 22 -10 Margins - Cumulative (%) Yield on loans 11.5 11.3 11.2 11.1 10.5 10.5 10.5 10.4 10.3 -8 -22 Yield On Investments 7.9 7.9 7.9 7.9 7.8 7.8 7.8 7.9 8.0 12 18 Yield on Funds 9.1 9.0 8.9 8.8 8.5 8.4 8.4 8.3 8.3 -5 -20 Cost of Deposits 7.0 7.0 6.9 6.8 6.4 6.4 6.4 6.3 6.1 -22 -31 Cost of Funds 5.9 5.9 5.8 5.7 5.3 5.3 5.2 5.2 5.1 -6 -14 Spreads 3.2 3.2 3.1 3.1 3.2 3.2 3.2 3.1 3.1 1 -6 Margins 3.6 3.6 3.5 3.5 3.5 3.5 3.5 3.2 3.4 22 -10 Franchise Branches 5,697 5,748 5,788 5,873 5,929 6,019 6,075 6,200 6,340 ATM 6,059 6,005 6,058 6,313 6,460 6,577 6,698 6,940 7,717


26 July 2014 9


Quarterly Snapshot continued FY12 FY13 FY14 FY15 Variation (%) INR b 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q QoQ YoY Balance Sheet Loans 2,429 2,490 2,626 2,938 2,945 2,947 2,973 3,088 3,051 3,139 3,261 3,493 3,475 -1 14 Investments 1,006 1,105 1,167 1,227 1,207 1,290 1,305 1,299 1,330 1,341 1,434 1,438 1,383 -4 4 Assets 3,857 4,030 4,219 4,582 4,592 4,720 4,700 4,789 4,811 4,943 5,219 5,504 5,468 -1 14 Deposits 3,241 3,418 3,565 3,796 3,854 4,007 3,858 3,916 3,968 4,057 4,206 4,514 4,449 -1 12 Deposits Break Up Core Deposits 2,463 2,607 2,709 2,913 3,000 3,174 3,267 3,426 3,619 3,675 3,871 4,128 4,037 -2 12 % of total Deposits 76.0 76.3 76.0 76.7 77.8 79.2 84.7 87.5 91.2 90.6 92.0 91.5 90.7 -73 -46 Other Deposits 778 811 856 883 854 833 591 489 350 382 336 386 412 7 18 % of total Deposits 24.0 23.7 24.0 23.3 22.2 20.8 15.3 12.5 8.8 9.4 8.0 8.5 9.3 73 46 Deposits Break Up CASA Deposits 1,213 1,240 1,260 1,341 1,331 1,434 1,424 1,533 1,499 1,564 1,610 1,729 1,636 -5 9 % of total Deposits 37.4 36.3 35.3 35.3 34.6 35.8 36.9 39.2 37.8 38.5 38.3 38.3 36.8 -152 -101 Savings 949 1,005 1,027 1,057 1,074 1,154 1,171 1,235 1,232 1,302 1,338 1,414 1,366 -3 11 % of total Deposits 29.3 29.4 28.8 27.8 27.9 28.8 30.4 31.5 31.1 32.1 31.8 31.3 30.7 -62 -35 Current 264 235 233 285 257 280 253 299 267 262 271 315 271 -14 1 % of total Deposits 8.1 6.9 6.5 7.5 6.7 7.0 6.6 7.6 6.7 6.5 6.5 7.0 6.1 -90 -65 Term Deposits 2,028 2,178 2,306 2,455 2,522 2,573 2,433 2,382 2,469 2,493 2,597 2,785 2,813 1 14 % of total Deposits 62.6 63.7 64.7 64.7 65.4 64.2 63.1 60.8 62.2 61.5 61.7 61.7 63.2 152 101 Loan Break Up Agriculture 342 351 383 459 446 403 418 381 370 409 441 531 489 -8 32 SME Loans 273 291 299 324 310 307 312 336 348 365 437 465 446 -4 28 Retail Loans 241 247 260 292 293 299 303 313 320 342 361 389 390 0 22 Other loans 1,573 1,601 1,684 1,863 1,896 1,939 1,941 2,059 2,013 2,022 2,023 2,109 2,150 2 7 Investment book HTM 775 803 849 861 926 939 927 913 865 960 964 957 955 0 10 AFS and HFT 235 308 326 371 284 353 380 390 463 368 454 448 388 -13 -16 AFS (%) 23.29 27.71 27.73 30.10 23.48 27.34 29.10 29.96 34.88 27.69 32.02 31.87 28.90 -298 -598 SLR (%) 26.1 28.4 28.1 26.4 25.9 30.1 29.8 28.0 29.2 27.0 28.8 25.0 25.4 33 -388 M. duration (Yrs) - Portfolio 4.45 4.32 4.32 4.26 4.46 4.59 4.70 4.56 4.82 4.62 4.56 4.51 4.69

AFS 2.64 2.74 2.68 3.07 2.72 3.66 4.35 4.17 4.66 3.77 4.05 4.29 4.24 Asset Quality Movement of NPA -Quarterly Opening 43.8 48.9 51.5 64.4 87.2 99.9 140.2 140.0 134.7 150.9 165.3 165.9 188.8 Additions 11.8 9.9 16.8 28.2 27.7 45.4 3.6 9.7 35.9 23.8 11.4 37.0 29.6 Deductions 6.6 7.4 3.9 5.4 15.0 5.1 3.9 15.0 19.7 9.4 10.7 14.1 22.3 Cash Recovery 4.2 5.1 3.3 4.1 5.7 3.8 5.5 4.4 8.0 6.7 6.3 5.0 7.5 Upgradation 2.3 2.1 0.3 0.7 9.0 1.1 -2.0 1.5 3.7 2.0 0.6 8.1 2.6 Write offs 0.1 0.2 0.3 0.7 0.3 0.2 0.4 9.1 8.0 0.7 3.8 1.0 12.2 Closing 48.9 51.5 64.4 87.2 99.9 140.2 140.0 134.7 150.9 165.3 165.9 188.8 196.0 Net Slippages 5.3 2.7 13.2 23.4 13.0 40.5 0.1 3.7 24.2 15.1 4.5 23.9 19.5 -18 -20 Net Slippage Ratio (%) 1.07 0.52 2.39 3.87 2.15 6.51 0.02 0.51 3.29 2.05 0.61 3.09 2.55 -54 -74 Credit cost (%) 0.93 0.52 0.91 1.35 1.22 1.55 0.63 1.10 0.88 1.30 1.35 2.08 1.57 -51 69


26 July 2014 10


z

Financials: Valuation Matrix60.02 Rating CMP Mcap Dividend

(INR) (USDb) FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 Yield (%) #ICICIBC* Buy 1,476 28.4 99 120 12.5 10.1 580 668 2.13 1.82 1.8 1.8 15.7 16.6 1.6HDFCB Buy 836 33.4 44 55 19.0 15.1 215 257 3.88 3.25 2.0 2.0 22.3 23.4 0.8AXSB Buy 1,986 15.5 151 177 13.2 11.2 937 1,088 2.12 1.83 1.7 1.7 17.2 17.4 1.0KMB* Neutra l 944 12.1 38 47 24.5 20.1 274 319 3.45 2.96 1.8 1.8 13.6 14.6 0.1YES Buy 539 3.7 47 59 11.5 9.1 281 328 1.92 1.64 1.6 1.7 20.7 19.4 1.5IIB Buy 549 4.8 34 43 16.1 12.8 193 228 2.85 2.41 1.9 1.9 19.0 20.4 0.6VYSB Buy 602 1.9 39 45 15.5 13.3 400 437 1.50 1.38 1.1 1.2 10.1 10.8 1.0FB Buy 118 0.3 11 13 10.9 9.3 90 99 1.32 1.19 1.1 1.1 12.7 13.5 1.7J&KBK Buy 1,622 1.3 258 280 6.3 5.8 1,372 1,576 1.18 1.03 1.5 1.4 20.2 19.0 3.1SIB Buy 31 0.7 3.6 4.3 8.6 7.2 27 30 1.14 1.02 0.8 0.9 14.1 15.0 2.6Private Aggregate 102.2 15.9 13.1 2.56 2.23SBIN (cons)* Buy 2,501 31.1 259 344 9.2 6.9 2,097 2,378 1.14 1.00 0.8 0.9 12.7 15.6 1.2PNB Buy 923 5.6 153 184 6.0 5.0 1,086 1,249 0.85 0.74 1.0 1.0 15.0 15.8 1.1BOI Neutra l 286 3.1 53 67 5.3 4.3 437 496 0.65 0.58 0.6 0.6 12.9 14.3 1.8BOB Buy 862 6.2 118 149 7.3 5.8 859 974 1.00 0.88 0.7 0.8 14.5 16.3 2.5CBK Buy 395 3.0 63 81 6.3 4.9 564 626 0.70 0.63 0.5 0.6 11.6 13.6 2.8UNBK Buy 193 2.0 28 34 6.9 5.6 291 319 0.66 0.60 0.5 0.5 10.0 11.3 2.1OBC Buy 281 1.4 45 55 6.3 5.1 460 502 0.61 0.56 0.6 0.6 10.0 11.4 2.7INBK Buy 156 1.2 23 28 6.7 5.5 266 288 0.59 0.54 0.6 0.6 9.1 10.1 3.0CRPBK Neutra l 359 1.0 45 62 7.9 5.8 638 687 0.56 0.52 0.3 0.4 7.3 9.3 1.3ANDB Neutra l 84 0.8 11 13 7.8 6.6 156 165 0.54 0.51 0.4 0.4 7.1 8.0 1.3IDBI Neutra l 90 2.4 8 10 11.0 8.6 143 151 0.63 0.60 0.4 0.4 5.9 7.1 1.1DBNK Neutra l 68 0.6 13 16 5.2 4.4 128 141 0.53 0.49 0.5 0.6 10.6 11.6 3.0Public Aggregate 59.5 8.9 6.9 0.92 0.83HDFC* Buy 1,064 27.7 33 40 23.9 18.5 144 166 5.46 4.39 2.5 2.5 25.6 24.4 1.3LICHF Buy 296 2.5 27 32 10.8 9.1 172 198 1.73 1.50 1.4 1.4 17.1 17.6 1.5DEWH Buy 361 0.8 54 68 6.6 5.3 317 367 1.14 0.98 1.4 1.5 18.3 20.0 2.4IDFC Neutra l 155 3.9 13 13 12.2 11.8 99 109 1.31 1.15 2.8 3.0 12.8 11.9 1.7RECL Buy 306 5.0 57 66 5.4 4.6 248 299 1.23 1.02 3.5 3.4 25.3 24.1 3.1POWF Buy 262 5.8 51 60 5.1 4.4 252 297 1.04 0.88 3.3 3.2 21.8 21.9 3.5SHTF Buy 886 3.3 70 90 12.6 9.8 435 514 2.03 1.72 2.3 2.6 16.6 18.5 0.8MMFS Neutra l 239 2.2 16 19 15.2 12.3 102 116 2.34 2.06 2.6 2.7 16.4 17.8 1.6BAF Buy 2,287 1.9 173 199 13.2 11.5 941 1,107 2.43 2.07 3.1 2.9 19.9 19.4 1.2NBFC Aggregate 53.1 12.8 10.9 2.40 2.09*Multiples adj. for value of key ventures/Investments; For ICICI Bank and HDFC Ltd BV is adjusted for investments in subsidiaries

# Div Yield based on FY13 decleared dividend; UR: Under Review

EPS (INR) P/E (x) BV (INR) RoA (%) RoE (%)P/BV (x)

EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%)

FY15 153.0 127.7 19.8

FY16 184.0 159.2 15.6

Shareholding pattern (%)

Jun-14 Mar-14 Jun-13

Promoter 58.9 58.9 57.9

DII 19.5 18.7 19.1

FII 17.4 17.2 18.0

Others 4.3 5.3 5.1 Note: FII Includes depository receipts

Stock performance (1-year)

400

570

740

910

1,080

Jul-13 Oct-13 Jan-14 Apr-14 Jul-14

Punjab National Bank Sensex - Rebased

26 July 2014 11


Financials and valuation Income Statements (INR Billion) Y/E March 2014 2015E 2016E 2017E Interest Income 432.2 483.3 541.5 635.0 Interest Expense 270.8 302.2 333.2 390.8 Net Interest Income 161.5 181.1 208.3 244.2 Change (%) 8.7 12.2 15.0 17.3 Non Interest Income 45.8 50.4 58.3 67.0 Net Income 207.2 231.6 266.5 311.2 Change (%) 8.7 11.7 15.1 16.8 Operating Expenses 93.4 103.4 114.6 127.1 Pre Provision Profits 113.8 128.2 152.0 184.1 Change (%) 4.4 12.6 18.5 21.1 Provisions (excl tax) 66.9 45.5 52.6 60.2 PBT 46.9 82.7 99.4 123.9 Tax 13.5 27.3 32.8 40.9 Tax Rate (%) 28.7 33.0 33.0 33.0 Profits for Equity SH 33.4 55.4 66.6 83.0 Change (%) -29.6 65.7 20.3 24.6 Equity Dividend (Incl tax) 4.2 6.5 7.8 9.7 Core PPP* 103.2 116.3 138.1 168.2 Change (%) 3.2 12.7 18.7 21.8

Balance Sheet (INR Billion) Y/E March 2014 2015E 2016E 2017E Equity Share Capital 3.6 3.6 3.6 3.6 Reserves & Surplus 355.3 404.5 463.1 536.7 Net Worth 359.0 408.1 466.7 540.3 Deposits 4,514.0 5,055.6 5,965.7 7,039.5 Change (%) 15.3 12.0 18.0 18.0 of which CASA Dep 1,728.7 1,972.3 2,250.8 2,569.4 Change (%) 12.7 14.1 14.1 14.2 Borrowings 480.3 481.3 514.4 553.9 Other Liabilities & Prov. 150.9 171.5 196.3 224.5 Total Liabilities 5,504.2 6,116.6 7,143.1 8,358.1 Current Assets 0.0 0.0 0.0 0.0 Investments 1,437.9 1,509.7 1,736.2 1,996.6 Change (%) 10.7 5.0 15.0 15.0 Loans 3,492.7 4,016.6 4,739.6 5,592.7 Change (%) 13.1 15.0 18.0 18.0 Fixed Assets 34.2 35.7 37.1 38.6 Other Assets 87.3 96.0 105.6 116.2 Total Assets 5,504.2 6,116.6 7,143.1 8,358.1

Asset Quality (INR Billion) Y/E March 2014 2015E 2016E 2017E GNPA 188.8 202.2 212.0 235.3 NNPA 99.2 95.7 84.5 81.1 GNPA Ratio 5.3 4.9 4.4 4.1 NNPA Ratio 2.8 2.4 1.8 1.5 PCR (Excl Tech. write off) 47.5 52.7 60.2 65.5 PCR (Incl Tech. Write off) 59.1 65.1 71.7 75.9

Ratios Y/E March 2014 2015E 2016E 2017E Spreads Analysis (%) Avg. Yield-Earning Assets 9.0 8.9 8.7 8.7 Avg. Yield on loans 9.8 9.9 9.6 9.6 Avg. Yield on Investments 7.5 7.0 7.0 7.0 Avg. Cost-Int. Bear. Liab. 5.8 5.7 5.5 5.6 Avg. Cost of Deposits 6.0 5.8 5.5 5.4 Interest Spread 3.1 3.1 3.2 3.2 Net Interest Margin 3.3 3.3 3.3 3.3 Profitability Ratios (%) RoE 10.2 15.0 15.8 17.0 RoA 0.6 1.0 1.0 1.1 Int. Expense/Int.Income 62.6 62.5 61.5 61.5 Fee Income/Net Income 16.0 15.5 15.6 15.5 Non Int. Inc./Net Income 22.1 21.8 21.9 21.5 Efficiency Ratios (%) Cost/Income* 45.1 44.6 43.0 40.8 Empl. Cost/Op. Exps. 69.7 69.2 68.8 68.3 Busi. per Empl. (Rs m) 114.1 125.0 139.7 159.2 NP per Empl. (Rs lac) 5.1 8.1 9.4 11.3 Asset-Liabilty Profile (%) Loans/Deposit Ratio 77.4 79.4 79.4 79.4 CASA Ratio 38.3 39.0 37.7 36.5 Investment/Deposit Ratio 31.9 29.9 29.1 28.4 G-Sec/Investment Ratio 78.2 80.4 82.5 84.6 CAR 11.5 11.4 10.8 10.4 Tier 1 8.9 9.0 8.8 8.7

Valuation Y/E March 2014 2015E 2016E 2017E Book Value (INR) 951.2 1,086.4 1,248.9 1,451.5 Change (%) 7.6 14.2 15.0 16.2 Price-BV (x) 1.0 0.8 0.7 0.6 Adjusted BV (INR) 759.5 901.4 1,085.6 1,294.6 Price-ABV (x) 1.2 1.0 0.9 0.7 EPS (Rs) 92.3 153.0 184.0 229.3 Change (%) -31.3 65.7 20.3 24.6 Price-Earnings (x) 10.0 6.0 5.0 4.0 Dividend Per Share (INR) 10.0 15.3 18.4 22.9 Dividend Yield (%) 1.1 1.7 2.0 2.5

26 July 2014 12


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punjab national bank q1fy15: buy for a target of rs1375

Economy & Finance

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