FINANCIAL INSTITUTIONS

CREDIT OPINION
20 November 2018
Punjab National Bank
Update to credit analysis after Q2 results
Update Summary
Punjab National Bank's (PNB) deposit rating of Ba1 is three notches above its Baseline Credit
Assessment (BCA) of b1, which reflects our assumption of a very high level of support from
the Government of India (Baa2 stable).

The key factor driving PNB's BCA is its weak asset-quality. The bank's gross nonperforming
RATINGS
loans (NPLs) remain high and accounted for 17.2% of its total loans as of 30 September
Punjab National Bank
Domicile India
2018.
Long Term CRR Baa3
Type LT Counterparty Risk
PNB's earnings power remains adequate, supported by good net interest margins (NIMs)
Rating - Dom Curr compared with similarly rated domestic peers. PNB's margins are also supported by its
Outlook Not Assigned nationwide franchise and leading position in northern India, resulting in sound funding and
Long Term Debt Not Assigned
liquidity. While PNB's profitability has been eroded by the fraud and credit provisions made
Long Term Deposit Ba1
Type LT Bank Deposits - Fgn over the past few quarters, the aforementioned factors provide moderate assurance that
Curr the bank will be able to return to profitability once the negative impact of the fraudulent
Outlook Stable
transactions is fully absorbed by the bank.
Please see the ratings section at the end of this report PNB’s capitalization is supported by capital infusions received from the government
for more information. The ratings and outlook shown
reflect information as of the publication date. amounting to INR82.47 billion in the first half of the fiscal year ending 2019 (fiscal 2019). In
terms of capital-raising options, we believe the bank will largely remain dependent on the
Indian government and the sale of its non-core assets.
Contacts
Exhibit 1
Alka Anbarasu +65.6398.3712 Rating Scorecard - Key financial ratios
VP-Sr Credit Officer
Punjab National Bank (BCA: b1) Median b1-rated banks
alka.anbarasu@moodys.com 35%
Srikanth Vadlamani +65.6398.8336 30%
VP-Sr Credit Officer 25%
srikanth.vadlamani@moodys.com 20%
15%
Jien Hoong Chew +65.6311.2649 10%
18.4%
Associate Analyst 5% 13.0% 33.2%
5.0%
jienhoong.chew@moodys.com 0%
-5% -1.6%
Graeme Knowd +81.3.5408.4149 Asset Risk: Capital: Profitability: Net Funding Structure: Liquid Resources: Liquid
MD-Banking Problem Loans/ Tangible Common Income/Tangible Assets Market Funds/ Banking Assets/Tangible
graeme.knowd@moodys.com Gross Loans Equity/Risk-Weighted Tangible Banking Assets Banking Assets
Assets
Solvency Factors Liquidity Factors
CLIENT SERVICES
Source: Moody's Financial Metrics
Americas 1-212-553-1653
Asia Pacific 852-3551-3077
Japan 81-3-5408-4100
EMEA 44-20-7772-5454
 MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit strengths
» Very high probability of government support, resulting in a three-notch uplift from the bank's BCA for its deposit ratings

» Defensible franchise, which supports the bank's funding and liquidity profiles

Credit challenges
» Weak asset quality, although we expect new NPL formation to stabilize

» Profitability and capital to remain under pressure in fiscal 2019, given high credit costs on NPLs, deferred losses on the fraudulent
transactions and investment losses

Outlook
PNB's rating outlook is stable. The stable outlook reflects our expectation that the negative impact of the fraudulent transactions is largely
known and is reflected in the ratings.

Factors that could lead to an upgrade

PNB’s BCA could be upgraded if the capital infusion received from the Indian government or any action taken by management
improves the bank’s capitalization to a level in line with that of its higher-rated Indian peers.

Factors that could lead to a downgrade

PNB's BCA and ratings could be downgraded if the bank’s capitalization deteriorates more than we expect. Furthermore, any indication
that government support to the bank has diminished would also lead to a rating downgrade.

Key indicators
Exhibit 2
PUNJAB NATIONAL BANK (Unconsolidated Financials) [1]
3-182 3-172 3-162 3-152 3-142 CAGR/Avg.3
Total Assets (INR billion) 7,640 7,170 6,645 6,005 5,480 8.74
Total Assets (USD billion) 117 110 100 96 92 6.34
Tangible Common Equity (INR billion) 268 357 342 372 339 -5.84
Tangible Common Equity (USD billion) 4.1 5.5 5.2 5.9 5.7 -7.84
Problem Loans / Gross Loans (%) 18.4 12.5 12.9 6.6 5.3 11.15
Tangible Common Equity / Risk Weighted Assets (%) 5.0 6.8 7.0 8.1 7.9 7.06
Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 130.2 89.6 97.1 51.1 41.7 81.95
Net Interest Margin (%) 2.0 2.2 2.4 2.9 3.2 2.55
PPI / Average RWA (%) 1.9 2.8 2.4 2.7 2.6 2.56
Net Income / Tangible Assets (%) -1.6 0.2 -0.6 0.5 0.6 -0.25
Cost / Income Ratio (%) 57.1 39.3 47.0 46.8 45.1 47.15
Market Funds / Tangible Banking Assets (%) 13.0 12.6 16.8 12.8 10.1 13.15
Liquid Banking Assets / Tangible Banking Assets (%) 33.2 33.7 31.1 30.6 29.3 31.65
Gross Loans / Due to Customers (%) 80.2 79.6 89.4 85.9 82.8 83.65
[1] All figures and ratios are adjusted using Moody's standard adjustments. [2] Basel III - fully-loaded or transitional phase-in; LOCAL GAAP. [3] May include rounding differences due to
scale of reported amounts. [4] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime. [5] Simple average of periods presented for the latest
accounting regime. [6] Simple average of Basel III periods presented.
Source: Moody's Financial Metrics

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.

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Profile
Punjab National Bank (PNB) is the second-largest public-sector bank and fourth-largest bank in India in terms of total assets (with a
market share of 5.8%) as of 31 March 2018.

PNB was established in 1895 and nationalized in 1969. As of 30 September 2018, the Indian government held a 66.09% stake in the
bank. As of that date, the bank operated through 6,998 domestic branches and 9,429 ATMs. PNB also has an international presence in
eight countries and territories: China, Hong Kong, Bhutan, Nepal, Kazakhstan, Bangladesh, the UAE and the UK.

Detailed credit considerations

Provisioning for the fraudulent transactions have weakened the bank's capital
On 14 February 2018, PNB announced to the stock exchange that it had discovered fraudulent and unauthorized transactions
amounting to INR113.9 billion ($1.7 billion). Based on the bank's subsequent announcements, its total exposure to these transactions
amounts to INR144 billion ($2.2 billion).

The fraudulent transactions represented 320 basis points of the bank's risk-weighted assets as of March 2018. In fiscal 2018, after
provisioning for 50% of the fraudulent exposure, the bank reported a Common Equity Tier 1 (CET1) capital ratio of 5.95%, compared
with 8.05% in Q3 2017. PNB had provided for 86% of the exposure as of 30 September 2018 and will provide for the remaining
exposure in the quarter ending December 2018.

PNB received capital infusions amounting to INR82.47 billion from the Indian government in Q2 of fiscal 2019, boosting the CET1 ratio
to 6.49% as of 30 September 2018.

Even after the capital infusion received in fiscal 2019, we estimate that PNB will still require further capital support of INR50
billion-INR60 billion in fiscal 2019 to help achieve a CET1 ratio of 8% under the Basel norms (minimum capital plus a 2.5% capital
conservation buffer). In terms of capital-raising options, we believe the bank will largely remain dependent on the Indian government
and the sale of its non-core assets.

PNB last raised INR50 billion in new capital via the equity capital market in December 2017. Nevertheless, we believe that the bank's
access to the equity capital market is limited, given the substantial decline in its share price since the discovery of the fraudulent
transactions. PNB's share price has declined by more than 50% since 14 February 2018.

PNB also owns a 33% stake in a listed housing finance company, PNB Housing Finance (PNBHF). While the share price of PNBHF
has declined by around 25% since the start of fiscal 2019, PNB's stake is worth around INR49 billion (as of 6 November 2018) and
represents a potential source of capital for PNB. The stake is valued at book value in the bank's investment portfolio.

We assign a Capital score of caa1 to reflect the above factors.

Asset quality has stabilized and resolution of stressed assets will result in further improvement
PNB's asset-quality metrics stabilized in H1 of fiscal 2019, with the bank reporting a gross NPL ratio of 17.2% as of 30 September 2018,
an improvement from the peak of 18.4% in March 2018.

In fiscal 2018, the bank's asset-quality metrics deteriorated significantly, with a gross NPL ratio of 18.4% compared with 12.5% a year
earlier. The increase in the ratio was largely driven by slippages from the bank's restructured portfolio as a result of the Reserve Bank of
India's (RBI) new guidelines on stressed assets, effective from 1 March 2018. In addition, a part of the fraudulent exposure was recorded
by the bank as NPLs, which added about 160 basis points to the bank's NPL ratio. Excluding the impact of the fraudulent transactions,
the reported NPL ratio would have been 16.8%.

Nevertheless, about 36% of PNB's NPLs are undergoing resolution under the National Company Law Tribunal (NCLT) as of 30 September
2018. The tribunal process started in July 2017, and we expect some of these resolutions to conclude over the next few quarters. Already,
some of the NPLs in the steel sector are in advanced stages of resolution. The significant resolution of problem assets will significantly
improve the bank's asset-quality metrics.

PNB has also been gradually building its loan-loss reserves to strengthen its buffer against potential losses from its impaired assets. As
of the end of September 2018, the bank's reported loan-loss coverage ratio improved to 66.9% from 59.2% a year earlier. In addition,

3 20 November 2018 Punjab National Bank: Update to credit analysis after Q2 results
 MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

the provision coverage for the bank's NCLT exposures stood at 71% as of as of 30 September 2018. However, the impact on the bank's
profitability and capitalization will depend on the haircuts PNB will need to take in the NPL resolution process.

We assign an Asset Risk score of caa1 to reflect the sizable stock of impaired assets, which will strain the bank's credit costs and overall
profitability.

Weakened core profitability in addition to fraud and credit provisions

PNB reported consecutive losses in Q1 and Q2 of fiscal 2019, and we expect the bank to report an overall net loss in fiscal 2019 after
taking into account the credit costs that include aging basis provisions on the NPLs and the deferred provisions on investment losses
incurred in fiscal 2018. This expected loss will strain the bank's capitalization further.

PNB reported a loss of INR54.7 billion in H1 of fiscal 2019, driven by the provision made for the fraudulent transactions, high credit
costs on NPLs and depreciation in the investment portfolio because of mark-to-market losses. As a result, the bank's net income/
tangible assets (annualized) stood at -1.4% as of 30 September 2018, compared with -1.6% in fiscal 2018 and 0.2% in fiscal 2017.
Nevertheless, we expect PNB to return to profitability once the negative impact of the fraudulent transactions is absorbed by the bank.

Excluding the one-off impact of the fraudulent transactions, PNB has been one of the more profitable Indian public-sector banks (PSBs)
because of its superior funding profile (higher proportion of low-cost deposits), which results in a better NIM than that of its peers. The
bank reported an NIM ratio of 2.68% in H1 of fiscal 2019, compared with 2.60% a year earlier.

We assign a Profitability score of caa1 to reflect the elevated credit costs and expected fraud exposure provisions in the subsequent
quarter.

A defensible franchise supports the bank's funding and liquidity

PNB's franchise has not changed significantly in the past few years and remains comfortable. The bank has maintained its position
among the five largest Indian banks, with a stable share of 5%-6% of system loans and deposits in the past five years.

PNB's defensible franchise is supported by both depositors and borrowers from the corporate and retail sectors, and it is sustained by
its public-sector status and its nationwide network of 6,998 domestic branches and 9,429 ATMs as of 30 September 2018.

Although we do not expect the discovery of the fraudulent transactions to hurt the bank's franchise, any punitive actions taken by the
regulator could impair its growth prospects over the next 12-18 months.

PNB's funding and liquidity remain stable and are supported by its large retail deposit base; around 85% of the bank's total assets were
funded by deposits as of 30 September 2018. The bank's proportion of low-cost current account and savings account deposits remained
stable at 43% as of 30 September 2018, compared with 44% a year earlier. Overall, the bank's deposits grew 2.1% as of 30 September
2018 from a year earlier.

We assigned a Funding Structure score of baa2 to reflect PNB's stable current account and savings account deposit ratio, and its strong
deposit growth compared with credit growth. We assign a Liquid Resources score of baa2 to reflect the bank's mandatory holdings of
government securities.

PNB has a limited international presence, with several foreign branches (Hong Kong, Dubai and an offshore banking unit in Mumbai) and
three representative offices (Dhaka, Shanghai and Dubai). The bank also has subsidiary operations in the UK and Bhutan, an associate in
Kazakhstan and a joint venture in Nepal. PNB's international operations contributed 4.8% of its total business as of 30 September 2018.

PNB's BCA is supported by India's Macro Profile of Moderate

Because PNB primarily operates domestically, the bank's Macro Profile is aligned with that of India at Moderate. The Indian economy
is large and diverse, with strong growth potential and improving global competitiveness. In addition, India's very large domestic market
provides strong domestic demand-driven growth, fueled by rising incomes, which shelter the economy from the impact of external
demand shocks.

Credit conditions in India reflect high and entrenched leverage in some corporate sectors. While growth in corporate lending has
slowed, corporate leverage remains high despite asset sales and fresh equity infusions. Household leverage, on the contrary, is low,
reflecting a low level of banking penetration.

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The financial system has experienced a deterioration in its asset quality in recent years. Nevertheless, we expect the stressed asset
(NPLs + restructured loans) ratios to be close to their peaks because most exposures to weak corporates have been recognized. A
cleanup of banks' balance sheets is underway, with the latest effort being the new rules for bad debt resolution implemented by the RBI
in March 2018 where banks can no longer resort to various loan restructuring schemes to delay the recognition of NPLs. This initiative
follows the review conducted by the RBI in December 2015 and the promulgation of the Insolvency and Bankruptcy Code 2016, which
provides a clearer framework for NPL resolution. The amount of haircuts that banks agree to in the upcoming NPL resolutions will be a
driver for their financial profiles.

The banks remain largely deposit funded, with a healthy contribution from current and savings account deposits. That said, individual
banks vary in their ability to gather retail deposits. PSBs (excluding State Bank of India [Baa2 stable]) are more dependent on wholesale
deposits, while private-sector banks tend to have stronger capabilities in retail marketing.

Domestic liquidity is also supported by the statutory liquidity requirement that obligates banks to hold 19.5% of total term and
demand deposits in the form of liquid government securities. Furthermore, all the banks rated by us are able to meet their current
liquidity coverage ratio (LCR) requirements. The banks can meet their LCR requirements even though only a part of their holdings of
government securities are included as high-quality liquid assets in LCR calculations. This is proof of the robustness of their liquidity.

The Indian banking system had total assets of around INR133 trillion (around $2 trillion) as of 31 March 2018, equivalent to around
81% of the country's GDP. PSBs represent more than 70% of total banking-system assets.

The government has policies that require banks to direct a portion of new loans to targeted segments known as priority sectors. All
banks must comply with priority-sector lending requirements. Nevertheless, we do not make any adjustments for industry structure,
given the fact that many banks (especially the private-sector banks) have performed well, despite priority-sector lending requirements.

Support and structural considerations

Affiliate support
PNB's rating does not benefit from affiliate support.

Government support considerations

Our assessment of a very high probability of government support to PNB in the event of financial distress takes into consideration the
bank's importance to the domestic banking industry and its close relationship with the government, which had a 66.09% stake in the
bank as of 30 September 2018. The government support is also illustrated by the fact that the bank’s funding and liquidity profiles have
remained largely stable, despite the negative news flow on the bank in the past few months. As a result of this assessment, the bank's
deposit rating of Ba1 receives a three-notch uplift from its BCA of b1.

For other junior securities held by PSBs in India, we believe that potential government support would be moderate. This view
reflects the increasing international trend of selectively imposing losses on holders of junior ranking securities (creditor bail-in) as a
precondition for an ailing bank to receive public-sector support.

Although India does not have an explicit legal framework to impose losses on creditors outside of bankruptcy, the global financial crisis
has demonstrated that bank recapitalization costs can be shared with subordinated creditors outside of the legal framework by means
of distressed exchanges, without triggering any contagion, as was previously feared.

Counterparty Risk (CR) Assessment

CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt and deposit
ratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expected financial loss suffered in
the event of default, and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The
CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing),
derivatives (for example, swaps), letters of credit, guarantees and liquidity facilities.
PNB's CR Assessment is positioned at Baa3(cr)/P-3(cr)
The CR Assessment, before government support, is positioned one notch above the bank's Adjusted BCA of b1. We then assign government
support assumptions, in line with our support assumptions on deposits and senior unsecured debt. Such assignments reflect our view

5 20 November 2018 Punjab National Bank: Update to credit analysis after Q2 results
 MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

that any support provided by governmental authorities to a bank, and which benefits senior unsecured debt or deposits, is very likely to
benefit operating activities and obligations reflected by the CR Assessments. Such a view is consistent with our belief that governments
are likely to maintain the banks' operations as a going concern to reduce contagion and preserve the banks' critical functions.

Counterparty Risk Ratings (CRRs)

CRRs are opinions of the ability of entities to honor the uncollateralized portion of non-debt counterparty financial liabilities (CRR
liabilities) and also reflect the expected financial losses in the event such liabilities are not honored. CRR liabilities typically relate to
transactions with unrelated parties. Examples of CRR liabilities include the uncollateralized portion of payables arising from derivatives
transactions and the uncollateralized portion of liabilities under sale and repurchase agreements. CRRs are not applicable to funding
commitments or other obligations associated with covered bonds, letters of credit, guarantees, servicer and trustee obligations, and
other similar obligations that arise from a bank performing its essential operating functions.
PNB’s CRR is positioned at Baa3/P-3
We consider India a jurisdiction with a nonoperational resolution regime. For nonoperational resolution regime countries, the starting
point for the CRR is one notch above the bank's Adjusted BCA, to which we then typically add the same notches of government
support uplift as applied to the CR Assessment.

About Moody's Bank Scorecard

Our scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read in conjunction
with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our scorecard may materially differ
from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong divergence). The scorecard
output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to
each rated entity.

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Rating methodology and scorecard factors

Exhibit 3
PUNJAB NATIONAL BANK
Macro Factors
Weighted Macro Profile Moderate 100%

Factor Historic Initial Expected Assigned Score Key driver #1 Key driver #2
Ratio Score Trend
Solvency
Asset Risk
Problem Loans / Gross Loans 18.4% caa1 ←→ caa1 Quality of assets Collateral and
provisioning coverage
Capital
TCE / RWA 5.0% caa2 ←→ caa1 Expected trend
Profitability
Net Income / Tangible Assets -1.6% caa3 ←→ caa1 Earnings quality
Combined Solvency Score caa2 caa1
Liquidity
Funding Structure
Market Funds / Tangible Banking Assets 13.0% baa2 ←→ baa2 Deposit quality
Liquid Resources
Liquid Banking Assets / Tangible Banking Assets 33.2% baa2 ←→ baa2 Stock of liquid assets
Combined Liquidity Score baa2 baa2
Financial Profile b1
Business Diversification 0
Opacity and Complexity 0
Corporate Behavior 0
Total Qualitative Adjustments 0
Sovereign or Affiliate constraint: Baa2
Scorecard Calculated BCA range ba3-b2
Assigned BCA b1
Affiliate Support notching 0
Adjusted BCA b1

Instrument class Loss Given Additional Preliminary Rating Government Local Currency Foreign
Failure notching Notching Assessment Support notching Rating Currency
Rating
Counterparty Risk Rating 1 0 ba3 3 Baa3 --
Counterparty Risk Assessment 1 0 ba3 (cr) 3 Baa3 (cr) --
Deposits 0 0 b1 3 Ba1 Ba1
[1] Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information.
Source: Moody's Financial Metrics

Ratings
Exhibit 4
Category Moody's Rating
PUNJAB NATIONAL BANK
Outlook Stable
Counterparty Risk Rating -Dom Curr Baa3/P-3
Bank Deposits Ba1/NP
Baseline Credit Assessment b1
Adjusted Baseline Credit Assessment b1
Counterparty Risk Assessment Baa3(cr)/P-3(cr)
Issuer Rating Ba1
Source: Moody's Investors Service

7 20 November 2018 Punjab National Bank: Update to credit analysis after Q2 results
 MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

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Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally
Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an
entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered
with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred
stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees
ranging from JPY200,000 to approximately JPY350,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

REPORT NUMBER 1148202

8 20 November 2018 Punjab National Bank: Update to credit analysis after Q2 results
 MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Contacts CLIENT SERVICES

Alka Anbarasu +65.6398.3712 Srikanth Vadlamani +65.6398.8336 Americas 1-212-553-1653

VP-Sr Credit Officer VP-Sr Credit Officer
Asia Pacific 852-3551-3077
alka.anbarasu@moodys.com srikanth.vadlamani@moodys.com
Jien Hoong Chew +65.6311.2649 Graeme Knowd +81.3.5408.4149 Japan 81-3-5408-4100
Associate Analyst MD-Banking EMEA 44-20-7772-5454
jienhoong.chew@moodys.com graeme.knowd@moodys.com

9 20 November 2018 Punjab National Bank: Update to credit analysis after Q2 results