Performance Highlights
We are happy to mention that Punjab National Bank recorded all-round improvement in its performance during the year.

During 2006-07, the bank earned a Net Profit of Rs.1540.08 crore compared to Rs.1439.31 crore in the previous year, registering a growth of 7%. This level of profit has been achieved after making provisions of Rs.1691 crore towards income tax, NPAs, standard assets, depreciation etc. Operating Profit registered a growth of 10.8% to touch Rs.3230.65 crore as compared toRs.2917.13 crore in the previous year. Bank continues to remain its Number One position amongst nationalised banks in respect of operating and net profit.

Capital and reserves increased to Rs.10,435 crore, representing a growth of 11.3% over the previous year.

Total Income increased by 15.9% to Rs.12,580 crore. Interest income recorded a growth of 20.4% to Rs.11,537 crore in 2006-07. No-interest income through commission, exchange and brokerage increased by 28.9% to Rs.970 crore.

Total expenses (excluding provisions) at Rs.9349 crore have increased by 217.7% during the year, mainly on account of higher interest expenses (increased by 22.5%), as a result of RBI’s monetary tightening, particularly in the last quarter. As a result, cost of deposit has increased marginally from 4.32% in 2005-06 to 4.53% in 2006-07. Our emphasis on low cost deposits has paid off in containing the increase in interest expenses to lower level than the peer banks.

Capital to Risk Asset Ratio (CRAR) increased to 12.29% at the end of March, 2007 compared to 11.95% at the end of March, 2006.

Gross NPAs as percentage to Gross Advances have declined to 3.45% as at the end of March 2007 from 4.120% as at end of March, 2006. But Ratio of net NPAs to net advances increased to 0.76% from 0.29% at the end of March, 2006.

We are happy to mention that the Board of Directors of the bank has recommended a final dividend of 60% for 2006-07. This is in addition to the interim dividend of 40% paid earlier by the bank.

Business Performance
During the year 2006-07, bank has opened 53 new branches, taking the total to 4119.  Total business of the bank stood at Rs.2,36,456 crore registering a growth of 21.7%. At the end of March, 2007, total deposits of the bank amounted to Rs.2,39,860 crore, posting a growth of 16.9% over the previous year. We may mention that the bank has been enjoying competitive advantage by way of lower funding costs through higher share of low cost deposits. Our emphasis has been on mobilising more such deposits and we would liken to inform you that the bank’s share of low  cost deposits is 46.16% as on  March’07 which is one of the highest in the industry.

Keeping in view the varying customer requirements, the bank modified its existing deposits schemes viz., PNB Prudent Sweep and PNB Smart Roamer-Deposit hybrid schemes, besides adding new variants like PNB Tax Saver Fixed Deposit and introduced a new scheme called “PNB Mahabachat scheme”. As a move towards greater financial inclusion, then bank has opened more than 1.70 lac zero-balance to frill account under “PNB Mitra” scheme. Continuing its thrust to provide technology-based financial solutions, the bank upgraded its “PNB Insta Remit” (RTGS product) to provide On-line RTGS facility w.e.f. Jan 25, 2007 and also made available NEFT (National Electronic Funds Transfer) facility at 443 branches of our Bank.

Advances
At the end of March, 2007, advances of the bank amounted to Rs.96,597 crore, witnessing a growth of 29.4%. During the year, emphasis was on improving the loan yield and strengthening asset quality.  A well diversified loan portfolio enabled the bank to further improve the loan yield to 9.17% for the year ended March, 2007 from 8.31% in the previous year.

To give focused attention to credit needs corporate clients, the bank established one new Large Corporate Branch at Tolstoy house, New Delhi during the year to take the total tally of such branches to eight. Presently, LCBs are operating at Ahmedabad, Bangalore, Chennai, New Delhi, Kolkata, Ludhiana and Mumbai centres. Besides, to facilitate the mid-sized business segment, as on  March’07 the Bank has opened Mid Corporate Branches (MCBs) at nine centres such as Delhi, Mumbai, Indore, Nagpur, Jaipur, Ghaziabad, Hyderabad, Goa and Chandigarh to exclusively cater to their credit needs.  With retail credit emerging as a growth driver, the bank has been focusing on this segment. Bank’s outstanding retail loans amounted to Rs.21,361 crore at the end of March, 2007, posting a growth of 21%. In  particular, segments like housing loan, loan to traders and mortgages posted major gains during the year. To further increase the share of retail business, the bank launched new products as well as modified the existing ones to suit the customers’ requirements. Further, for ensuring faster credit delivery, the Bank has set up 42 Hubs for sanctions of Housing and car loans. 43 prominent educational institutions have been identified under our Education Loan Scheme “PNB Sarvottam Shiksha” to offer education loan at comparatively lesser rate of interest. Bank has also made available option of life insurance cover for its existing as well as new Housing Loan customers under Mortgage Reducing Term Assurance Concept, in  tie up arrangement with Tata AIG.

Priority Sector
The bank has always been committed to fulfillment of its social responsibilities aimed at supporting the rural economy and eradication  of poverty. The bank’s priority sector advances touched Rs.40,198 crore at the end of March, 2007. The ratio of PS credit to net bank credit was 41.89% as against the national goal of 40%. Credit to agriculture grew by 27.3% and the share of agriculture credit to net bank credit was 18.91% against the stipulated goal of 18%. During the year, your bank issued 3.17 lac Kisan Credit Cards.

We are happy to mention  that the Bank achieved the target of doubling the credit flow to agriculture in  three years and achieved 30% annual growth as per the Finance Minister’s Policy package announced in  June, 2004. In this regard, the bank disbursed Rs.12955 crore during 2006-07 as against RBI target of Rs.12815 crore under Special Agricultural Credit plan, thereby achieving 101.10% of the target. Here, I would also like to add that the bank has been creating awareness about its schemes as well as cultivation practices, technical aspects of food grains, cash crops, mechanical/aromatic plants, vegetables, fruits, etc., daily mandi rates, marketing facilities etc. through Kisan Goshthies and through the Bank’s exclusive website,’www.pnbkrishi.com’. Further, the bank launched some innovative products for farmers during 2006-07 like Scheme for financing Joint Liability Groups (JLGs) to tenant farmers, sharecroppers & oral lessees ; Scheme for financing Agricultural Graduates for setting up of Agri-clinics and Agri-business Centres (ACABC), with a provision of subsidy ; Scheme for financing Jatropa Plantation for promotion of alternative energy sources ; PNB kalyani Card for fulfilling farm/non-farm credit needs of women; and Scheme for financing sericulture.

Credit to small scale industry  grew by 28% during the year and the bank adopted cluster-based approach to provide further boost to this sector. We are happy to mention that in recognition of the efforts of the bank to promote this sector, it has been conferred with National Award 1st  prize )  for lending to Tiny Sector for the year 2005-06 by Ministry of Small Scale industries.

Asset Quality
The ratio of Gross NPAs to Gross Advances of the bank came down to 3.45% as on 31st March,2007 from 4.10% as on 31st March, 2006. However, the ratio of net NPAs to net advances increased from 0.29% as on 31st march, 2006 to 0.76% as on March 31st , 2007.

The bank gave special thrust on upgradation of NPAs to performing category during the current year. A special recovery campaign under the banner “Mission Recovery” was also launched successfully in all the zones with special emphasis on resolution of NPA accounts under the segment of below Rs.10 lac.
 
The bank adopted various strategies including issue of notice to defaulting borrowers under the SARFEASI Act, sale of assets to Asset Reconstruction Company, arriving at negotiated settlement, use of Debt Recovery Tribunals and organising recovery camps. The bank came out with an OTS scheme for distressed farmers whose accounts have been rescheduled/restructured due to natural calamities. The bank has implemented the Corporate Debt Restructuring (CDR)  mechanism for the corporate sector, while similar scheme of debt restructuring has also been implemented for the small and medium enterprises.

Risk Management
The bank made significant progress in the area of Risk Management during the year. The bank looks to the Reserve Bank’s guidelines on Basel II as a platform for adopting best practices in  risk management. We would like to inform you that the bank is fully prepared to implement the approaches prescribed by the RBI for implementation of Basel II.

A comprehensive Credit Risk Management Policy has been evolved with the objective of understanding, measuring and mitigated  credit risk and strive to maintain the market share. Further, to avoid credit concentration and to achieve a well-diversified loan portfolio, the bank has laid down industry-wise exposure ceilings. The Credit Audit and Review Division (CARD) of the bank undertakes on-site credit audit of loan accounts.  During the year, over 1500 loan accounts were covered under credit audit.

To manage interest rate risk, the bank has adopted GAP  and Duration Gap Analysis.  Prudential limits have been fixed for impact on net Interest  income due to any adverse change in interest rates. Liquidity risk is managed through the GAP  Analysis based on residual maturity/behavioural maturity. Liquidity profile of the bank is analysed through various liquidity ratios and the prudential limits fixed thereon. To address operational risk, the bank has evolved operational risk management framework, mapping all activities/income into eight business lines as prescribed in the Basel Accord. As such, the bank is preparing for adopting Internal Ratings Based approaches for credit risk, VaR method for market risk and Advanced Measurement Approach (AMA)  for operational risk in due course of time.

International Banking
In its endeavour to become a global bank, the bank has upgraded its representative office at London (UK) into a wholly owned subsidiary. The bank has one foreign branch at Kabul (Afghanistan), besides representative offices at Shanghai (China), Almaty (Kazakhstan), Dubai (UAE). Further, the bank has also been granted licence by Hong Kong Monetary Authority to set up a branch at Hong Kong. The Bank also has an Offshore Banking Unit (OBU)  at SEEPZ, Mumbai for catering to the needs of units in Special Economic Zones (SEZs) & SEZ Developers. Further, the bank plans to open an Offshore Banking Unit at Singapore and a Subsidiary at Canada.

During the year, the export turnover of the bank stood at Rs.27,229 crore with YoY growth of 23.16% and the import turnover amounted to Rs.29,492 crore, thus posting YoY growth rate of 34.99%. Under precious metals business, the bank achieved gold import turnover of Rs.1224 crore and silver imports of Rs.180 crore during 2006-07. Here I would like to mention that Gold coin Scheme was launched by the Bank on 18th October, 2006 and your Bank sold 15047 gold coins weighing 135.81 kg. of gold upto 31st March, 2007.

The bank has entered into Rupee Drawing Arrangements with 20 exchange houses in the Middle East and Singapore to facilitate remittance from NRIs to their families in India.  Besides, arrangements exist with M/s. Western Union for Online Money Transfer services through 1000 branches all over the country. Internet based remittance services are also being provided through “Times Online Money Ltd.” and “Buyindiaonline.com”.

Technology
Recognising technology as a major driver of business, the bank continued its initiatives aimed at providing better customer experience and bringing down costs. Core banking Solution (CBS) at the end of March, 2007 covered 2526 service outlets covering 86% of business of the bank. With this, around 20 million customers of the bank now have the facility of “anytime, anywhere ” banking. Real Time Gross Settlement System (RTGS) has been implemented through internet banking at 2122 branches which empowers both Retail & Corporate Internet Banking customers to remit funds through internet banking.  We are happy to mention that our bank is the first Public Sector Bank to offer RTGS through internet banking. As part of development of alternative channels of service delivery, the bank has installed 1009 ATMs. Besides, the bank has entered into ATM sharing arrangement with other banks, through which customers can access over 21500 ATMs spread throughout the country.

Bank has made online share trading facility live which enables customers to trade anywhere/anytime and subscribed to IPOs, Mutual funds, debt instruments etc. The bank has also deployed Bilingual Banking Solution ‘bancmate’ in branches, which is available in regional language also in addition to English. Bank also has marketing rights for Bancmate software and the same has been marketed to many Regional Rural Banks and Cooperative Banks besides two nationalised banks namely Vijaya bank and United Bank of India.

We take pleasure in mentioning that in recognition of excellent work in the area of technology, the bank was conferred to Best IT Team for the year 2005-06 award by Institute for Development and research in Banking Technology (IDRBT), Hyderabad.

Human Resource Management
Continuing its emphasis on development of human resources, the bank focused on training of employees through its well equipped training infrastructure. The training modules covered areas like credit management, foreign exchange, risk management, NPA management, information  technology, fee-based income, effective leadership, team building etc. During the year, training was imparted to 39,259 employees. Besides, the bank has also established an autonomous Institute “PNB” Institute of Information Technology” at Lucknow, which is working as an Institute of excellence in the area of Information Technology.

The bank has implemented Human Resources Management System (HRMS) and created central data base with on-line connectivity to Head Office, Zonal Offices and Regional Offices for efficient upgradation of data and optimum utilisation of manpower.

In recognition of its efforts in this area, the bank was awarded the “Golden peacock Training award 2006” by the Institute of Directors, New Delhi, for the third year in succession.

During the year, the bank maintained cordial industrial relations and regular meetings were held with employee representatives on various issues.

Customer Grievances Redressal
Good customer service has always been a top priority of the bank. The bank maintains constant interaction with its clientele through Customer Meets which facilitate the bank to evaluate, improve and widen the range of services to customers. The bank holds such Meets regularly.

Customer Service Committees have also been set up in branches to review outstanding complaints, analyse causes and initiate appropriate action. The ‘Chief Host’ operating at all the Zonal offices has become popular with the customers for quick redressal of complaints.

The bank has provided “toll free’ call lines for customers to call, in case of any need.  The complaints received are regularly analysed at the controlling offices and prompt remedial action is taken. At the Head Office, this aspect is regularly monitored.

Complaints received from the office of the Banking Ombudsman are handled promptly and on priority basis.

A Board level Customer Service Committee is in place to ensure the quality of customer service and improving the level of customer satisfaction for all categories of clientele at all times. The Customer Service Committee is headed by Executive Director of the Bank and meets once in every quarter.

New Lines of Business & Performance of Subsidiaries
PNB’s Joint Venture Insurance Broking Co. i.e., PNB Principal Insurance Advisory Co. (P) Ltd. (IAC), collected insurance premium of Rs.133 crore during 2006-07 through branch network of PNB & Vijaya Bank, as compared to Rs.80 crore of premium collected last year. The Company also designed two new insurance products i.e., Tata-AIG’s MRTA product for Housing  Loan Borrowers & Reliance General insurance Co.’s Mediclaim Product for PNB customers. Principal-PNB AMC Pvt. Ltd. is a joint venture of the bank for undertaking distribution of mutual fund business and the bank has created a team of more than 300 well qualified marketing officials to advise potential investors.  While the co-branded PNB-HSBC credit card is continued to be offered, the bank is planning to launch its own credit card.  Besides, the bank is offering Cash Management Services and electronic Clearing Services to its customers.

PNB Housing Finance Ltd. (PNBHFL)
During the year 2006-07, PNB  Housing Finance Ltd. (PNBHFL)  has shown better performance under all parameters such as growth in business, growth in income and profitability and sharp reduction in NPAs. With strong growth in the real estate sector, PNB  Housing Finance Ltd. registered a growth of 66% in loan disbursements. Outstanding loans posted a growth of 40% to reach Rs.1541 crore at the end of March, 2007.  The profit After Tax of the company grew by 57% and announced to Rs.28 crore.

PNB Gilts Ltd.
PNB Gilts Ltd. continued to fulfill all its obligations as a primary dealer during 2006-07.  The company activity diversified into other non-core activities like investments in  equity/equity derivatives while consolidating its presence in existing fee based segments like project appraisal, mutual fund distribution and other merchant banking activities.  The net worth of the company stood at Rs.503 crore as on 31st March, 2007. It earned a Profit After Tax of Rs.16 crore.

The Road Ahead
During the year under review, your bank has achieved robust business growth and has improved its financial performance and with your support will continue to improve its performance against the backdrop of good credit and deposit growth. Strong fundamentals, large branch network and technological resources would facilitate the bank to improve business and earnings. Adequate presence of the bank in rural areas offers significant scope for business growth and greater financial inclusion. While the Bank would continue to make efforts to mobilise low cost deposits, ensuring quality credit grown will be a strategic goal for the bank. The bank endeavours to keep its funding costs low by emphasising on mobilisation of low cost deposits, while improved asset quality would help in boosting loan yield. The bank would further strengthen its risk management capabilities with a view to improve its asset quality earnings.

As competition gathers momentum, we need to be agile and alert so as to encash the opportunities. But opportunities are beset with risks as well  and we have to clearly articulate our risk appetite and take on risk which we can manage effectively. Keeping these as the guiding principles, your bank’s strategy is to keep the interest cost and operational costs down, leveraging on technology to deliver cost-effective banking solutions and target segments like retail, SMEs, agriculture and education loans.

The guiding principles of financial prudence, business ethics and customer care have established the bank as a major brand in the 113 years of its experience.  We are confident that the corporate values which the bank stands for, will help the bank to touch still greater heights in performance in the future.