>Punjab Nastional Bank (INDIA INFOLINE)

· Significant expansion in loan book over Q4 FY08- Q3 FY09
In the past four quarters, PNB's loan loan book has grown by 40% implying a CQGR of 8.7%. In 9m FY09, bank's advances have grown by 18.5% YTD impying an annualized growth of 25% yoy. This is in startk contrast to a material slowdown in the loan growth for the system. Key drivers behind PNB's brisk loan loan growth are 1) multiple lending constraints faced by large private sector banks 2) large corporate borrowers have been shifting to the large PSBs 3) extensive branch network and rural presence.

· NIM to dip in Q4 FY09; to remain at 3.5% in FY10E and FY11E
Over Q1-Q3 FY09, PNB's NIm has improved by 60 bps to 3.9%. The margin improvement was driven by more than commensurate increase in lending rate by the bank in response to an increase in cost of funds due to tight liquidity conditions between July-October 2008. Due to extensive branch network and strong brand, PNB was amongst, PNB was amongst the least affected banks during the liquidity crunch. However, PNB's NIM is expected to decline by 20-40 bps qoq in Q4 FY09 due to significant reduction in BPLR in the past four months. In FY10E and FY11E, we expect reported NIM to hover near 3.5%.

· Fragile asset quality; but deterioration to remain under check
Traditionally, PNB has witnessed higher GNPL% than most of the other PSBs due to its more aggressive lending strategy, which focuses on earning high NIMs. Though the asset quality could rapidly deteriorate in future due to worsening macro conditions, we believe that it would remain within bank's tolerance levels. We estimate Gross NPLs to incorease 2.5x and reach 4.2% of advances while net NPLs would jump 5x and represent 2% of advances by FY11

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