Ambit Research in a note said,
Residual stress in corporate loans at 5% of the loan book and further slippages in the retail/SME segment would keep credit cost elevated, at 215bps, in FY18E. The demonetisation has limited the bank’s ability to surmount asset quality problems as growth would reduce in line with system credit growth and pricing cuts by banks would put pressure on NIMs. With no headroom to improve operational efficiency, we expect average ROA and ROE of 1.26% and 14% in FY18-19. We have cut our FY18 EPS estimates by 22% and turn SELLers. Whilst we prefer Axis Bank over SBI and ICICI amongst corporate lenders due to better operating margins and better asset quality, the valuation premium of 70% largely captures the strength of the franchise.
PNB reported net profit of Rs2.07bn (up 4x YoY from a low base), 65% below our/consensus estimates. The disappointment was largely due to decline in loan book (down 2% QoQ), contraction in NIM (down 18bps QoQ) and higher-than-expected credit cost (345bps). Treasury gains (Rs5.2bn) and recoveries from written-off accounts (Rs9.4bn) supported operating profit growth of 8% YoY. However, core operating profit was down 21% YoY (15% below our estimate). Slippages to NPAs stayed elevated at ~6% of loans (annualised), along with credit cost staying high at 345bps (vs 225bps in 2QFY17). High quantum of stressed assets (18.2% of loans) with meagre provision coverage (~30%) means credit costs would stay elevated. We expect average credit cost of ~200bps in FY18-19E (vs ~320bps in FY15-17E). Weak tier-1 capital ratio (8.8%) would also constrain recovery in balance sheet/operating profit to offset these credit costs. We expect muted RoAs/RoEs of 0.3%/6%. We remain SELLers with TP of Rs110, valuing the standalone bank at 0.4x FY18E P/B
