I

n
d
i
a

R
e
s
e
a
r
c
h
DOLAT CAPITAL
October 21, 2014
B
a
n
k
i
n
g

/

R
e
s
u
l
t

U
p
d
a
t
e
Punjab National Bank
CMP: ` `` `` 931 TP: ` `` `` 1050 Accumulate
High Points
Asset quality saw a
noticable deterioration
with rise in delinquency
ratio
Slippages from the
restructured loans
remains high
Reducing target price to ` `` ``
1050 and revise rating to
Accumulate
Scrip Details
Equity ` 3621mn
Face Value ` 10/-
Market Cap ` 338bn
USD 5.5bn
52 week High / Low ` 1068 / 473
Avg. Volume (no) 1400639
BSE Sensex 26,787
NSE Nifty 7,995
Bloomberg Code PNB IN
Reuters Code PNBK.BO
Q2FY15 Result (` mn)
Particulars Sep-14 Sep-13 % Chg Jun-14 % Chg
Interest Income 114,621 107,335 7 115,887 (1)
Interest Expended 73,109 67,180 9 72,090 1
Net Interest Income 41,512 40,155 3 43,797 (5)
Non-Interest Income 15,584 8,993 73 12,364 26
Net Income 57,096 49,149 16 56,161 2
Operating Expenses 28,335 23,800 19 24,908 14
Operating profit 28,760 25,348 13 31,253 (8)
Provision & Contingencies 17,679 18,987 (7) 9,276 91
PBT 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 Joshi
Tel : +9122 4096 9750 Tel : +9122 4096 9706
E-mail: rajiv@dolatcapital.com E-mail: pranavj@dolatcapital.com
Financials
Year 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 10.1
FY15E 178,476 123,069 43,384 3.1 1,048 732 0.7 12.0 0.89 1.27 7.8
FY16E 211,439 145,200 55,352 3.2 1,171 859 0.8 13.8 0.79 1.08 6.1
FY17E 211,439 177,133 72,073 3.3 1,330 983 0.9 15.9 0.70 0.95 4.7
Figures in ` mn.
PNBs lower than expected performance was marred by several one offs like
reversal of interest on NPLs and FITLs; additional provision for NPLs, additional
provisions towards AS-15 and expected wage hikes. Adjusting for these, the
financial performance would have been almost in line with the street
expectations. That said, however, asset quality showed a noticeable deterioration
with additions to NPLs and restructured loans rising QoQ. We are even more
disappointed by the downgrades of restructured assets to NPAs, especially in
the current environment which is relatively better. Unless these were in sectors
which have gone bad to worse last few months, however we do not have any
information to corroborate further on this.
Asset quality for PNB has become quite volatile with almost alternating quarters
of improvement and stress. Total stressed assets at 15.6% of total loans were
higher than in the past 4 quarters. The management did not provide for any
guidance on the asset quality trend. We believe that the situation will remain
volatile for 2HFY15 as well, before it starts to improve in FY16.
Of the total gross slippages of ` 40 bn a third emanated from restructured
loans. In all, during 1HFY15, almost 40% of the fresh NPLs are being contributed
by the slippages in the restructured loans. While the pace of additions to the
restructured loans can see moderation, the pace of fresh NPL formations may
remain elevated in the near term.
The bank provided an additional ` 6.8bn towards NPLs, ensuring that the coverage
ratio is maintained, which we view as positive. Additionally, it provided ` 2.7bn
as the bank revised the assumptions relating to AS-15 and ` 600mn for the
expected wage revision. Adjusting for these the NIM and net profits would have
been almost flat QoQ.
2
DOLAT CAPITAL
India Research
PNB October 21, 2014
Yields & Margins (%) Sep-14 Sep-13 % Chg Jun-14 % Chg
Asset quality
Gross NPLs (` mn) 207,519 165,263 25.6 196,028 5.9
Gross NPLs (%) 5.65 5.14 5.48
Net NPLs (` mn) 116,178 96,090 20.9 104,636 11.0
Net NPLs (%) 3.26 3.07 3.02
Provisioning coverage (%) 44.0 41.9 46.6
Capital (%) bps bps
Tier-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 3
Deposits 4,735 4,057 17 4,449 6
CASA (%) 39.9 40.7 39.9
PNB continues to witness asset quality pressures both from its standard loans as
well as from the restructured loans. We believe that the bank would continue to
witness these pressures in the near term which can delay its re-rating in the short
term. Also there is an added uncertainty as extension to Mr K Kamath, CMD has
not yet been announced against our expectation that this will go through in good
time. However, till date there has been no clarity on that aspect, and his term ends
on 27
th
Oct. In case the current CMD's tenure ends, and there is no clarity on the
new incumbent, we believe there will be a further overhang on the stock, and will be
a risk to our Accumulate stance. Notably, the government has not yet appointed
new 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 meaningful
easing of the asset quality related stress and gains on the bond book (AFS duration
of 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.

3
DOLAT CAPITAL
India Research
PNB October 21, 2014
IMPORTANT RATIOS
Particulars Mar14 Mar15E Mar16E Mar17E
DPS (`) 10 25 34 34
Book Value (`) 953 1,048 1,171 1,330
Adjusted Book Value (`) 679 732 859 983
EPS (`) 92 120 153 199
Payout (%) 10.8 20.9 22.2 17.1
Tier 1 (%) 8.9 8.4 7.9 7.3
CAR (%) 11.5 10.9 10.3 9.7
Net interest margin (%) 3.2 3.1 3.2 3.3
Credit Spread (%) 2.9 2.8 2.9 3.0
Cost-to-income (%) 45.1 47.0 47.0 45.9
ROAA breakdown
Gross Interest spread 3.1 3.1 3.2 3.2
Less Provisions 1.3 1.0 0.9 0.9
Net Interest spread 1.8 2.1 2.2 2.4
Less Overheads 1.8 1.9 1.9 1.9
Net spread 0.0 0.2 0.3 0.4
Other income 0.9 0.9 0.9 0.9
Less Tax 0.3 0.4 0.4 0.5
ROAA 0.7 0.7 0.8 0.9
ROAE 10.2 12.0 13.8 15.9
Valuation
Price Earnings (x) 10.1 7.8 6.1 4.7
Price to Book Value (x) 0.98 0.89 0.79 0.70
Price to Adjusted BV (x) 1.37 1.27 1.08 0.95
Dividend Yield (%) 1.1 2.7 3.7 3.7
Asset Quality
Gross NPLs 188,801 222,700 246,474 271,992
Net NPLs 99,170 114,421 112,786 125,634
Provision coverage ratio (%) 47.5 48.6 54.2 53.8
Gross NPLs (%) 5.3 5.3 4.9 4.4
Net NPLs (%) 2.9 2.8 2.3 2.1
Assumpt i ons
Yield on Advances (%) 9.8 9.6 9.4 9.2
Yield on Investment (%) 7.5 7.2 6.9 6.8
Cost of Deposits (%) 6.0 5.8 5.5 5.3
Growth in credit book (%) 13.1 17.0 20.0 22.0
Growth in Deposits (%) 15.3 16.0 19.0 21.0
Growth in Investments (%) 10.7 10.0 8.0 10.0
Gross slippages ratio (%) 3.4 3.4 2.5 2.1
Credit Cost (%) 1.53 1.60 1.34 1.19
E-estimates
INCOME STATEMENT ` `` `` mn
Particulars Mar14 Mar15E Mar16E Mar17E
Interest Income 432,233 477,161 540,511 627,215
Interest Expenses 270,773 298,684 329,072 374,076
Net Interest Income 161,460 178,476 211,439 253,139
CEB 27,760 32,757 38,653 46,384
Profits on sale of investments 5,490 6,588 7,774 9,717
Profits on foreign exchange 5,440 5,984 6,882 8,051
Other operating income 7,079 8,495 9,345 10,279
Total other income 45,769 53,824 62,653 74,432
Total Income 207,229 232,300 274,093 327,570
Salaries 65,105 78,125 92,188 107,860
Other operating costs 28,278 31,106 36,705 42,577
Total Overheads 93,382 109,231 128,893 150,437
Profit before provisions 113,847 123,069 145,200 177,133
Total provisions 66,939 58,318 61,333 67,931
Profit before tax 46,908 64,752 83,867 109,202
Tax 13,481 21,368 28,515 37,129
Reported Net profit 33,426 43,384 55,352 72,073
BALANCE SHEET
Particulars Mar14 Mar15E Mar16E Mar17E
Cash with RBI and Call Money 452,185 438,619 482,481 540,379
Investments 1,437,855 1,581,641 1,708,172 1,878,989
Advances 3,492,691 4,086,449 4,903,738 5,982,561
Fixed Assets 20,116 20,616 21,116 21,616
Other Assets 87,271 79,248 90,164 112,638
Total Assets 5,490,118 6,206,572 7,205,671 8,536,182
Demand Deposits 314,992 628,344 747,730 904,753
Savings Deposits 1,413,429 1,466,137 1,744,703 2,111,090
Term Deposits 2,785,546 3,141,721 3,738,648 4,523,765
Total Deposits 4,513,967 5,236,202 6,231,081 7,539,608
Borrowings 480,344 432,310 389,079 350,171
Other Liabilities & Provisions 150,934 158,481 161,651 164,884
Equity 3,621 3,621 3,621 3,621
Reserves 341,251 375,958 420,240 477,899
Total Equity 344,872 379,579 423,861 481,520
Total Liab & Equity 5,490,118 6,206,572 7,205,671 8,536,182
E-estimates
Shareholding Pattern as on Sept'14 (%)
DOLAT CAPITAL
This report contains a compilation of publicly available information, internally developed data and other sources believed to be reliable. While
all reasonable care has been taken to ensure that the facts stated are accurate and the opinion given are fair and reasonable, we do not take
any responsibility for inaccuracy or omission of any information and will not be liable for any loss or damage of any kind suffered by use of
or reliance placed upon this information. For Pvt. Circulation & Research Purpose only.
Dol at Dol at Dol at Dol at Dol at Capital Market Pvt. Ltd.
20, Rajabahadur Mansion, 1st Floor, Ambalal Doshi Marg, Fort, Mumbai - 400 001
Our Research reports are also available on Reuters, Thomson Publishers, DowJ ones and Bloomberg (DCML <GO>)
BUY Upside above 20%
ACCUMULATE Upside above 5% and up to 20%
REDUCE Upside of upto 5% or downside of upto 15%
SELL Downside of more than 15%
Analyst Sector/Industry/Coverage E-mail Tel.+91-22-4096 9700
Amit Khurana, CFA Co-Head Equities and Head of Research amit@dolatcapital.com +91-22-40969745
Amit Purohit Consumer amitp@dolatcapital.com +91-22-40969724
Deepali Gautam Utilities deepalig@dolatcapital.com +91-22-40969795
Kunal Dalal Auto & Auto Ancillaries kunald@dolatcapital.com +91-22-40969749
Milind Bhangale Pharma milindb@dolatcapital.com +91-22-40969731
Pawan Parakh Capital Good pawanp@dolatcapital.com +91-22-40969712
Priyank Chandra Oil & Gas priyank@dolatcapital.com +91-22-40969737
Rahul J ain IT Services rahul@dolatcapital.com +91-22-40969754
Rajiv Pathak Financials rajiv@dolatcapital.com +91-22-40969750
Prachi Save Derivatives prachi@dolatcapital.com +91-22-40969733
Associates Sector/Industry/Coverage E-mail Tel.+91-22-4096 9700
Afshan Sayyad Agrochemicals afshans@dolatcapital.com +91-22-40969726
Abhishek Lodhiya Real Estate abhishekl@dolatcapital.com +91-22-40969753
Avinash Kumar Capital Goods avinashk@dolatcapital.com +91-22-40969764
Devanshi Dhruva Economy devanshid@dolatcapital.com +91-22-40969756
Manish Raj Cement manishr@dolatcapital.com +91-22-40969725
Pranav J oshi Financials pranavj@dolatcapital.com +91-22-40969706
Equity Sales/Trading Designation E-mail Tel.+91-22-4096 9797
Purvag Shah Principal purvag@dolatcapital.com +91-22-40969747
Vikram Babulkar Co-Head Equities and Head of Sales vikram@dolatcapital.com +91-22-40969746
Kapil Yadav AVP - Institutional Sales kapil@dolatcapital.com +91-22-40969735
Parthiv Dalal AVP - Institutional Sales parthiv@dolatcapital.com +91-22-40969705
P. Sridhar Head Sales Trading sridhar@dolatcapital.com +91-22-40969728
Chandrakant Ware Senior Sales Trader chandrakant@dolatcapital.com+91-22-40969707
J atin Padharia Head of Sales Trading - Derivatives jatin@dolatcapital.com +91-22-40969703
Shirish Thakkar Sales Trader - Derivatives shirisht@dolatcapital.com +91-22-40969702