State Bank of India's (SBI) Q1FY21 earnings exceeded our expectations on three key counts: 1) best-in-class collection efficiency - customers accounting for 90.5% of term loans met two or more EMI obligations and interest was deferred on only 11% of total interest accrued; 2) NIMs rebounded 30bps to 3.24% (after contracting in Q4FY20, implying it was a temporary blip); 3) cost flexibility visible even at such scale - operating costs (ex-employee) were down 8% YoY/25% QoQ. Credit cost was also managed at 1.9% (despite accelerated provisioning of Rs55bn towards HFC and Rs20bn Covid-related provisions). However, need for contingency buffer was not felt given comfortable collections, relatively lower vulnerability on asset portfolio, provision coverage (excluding AUCA of 67%) and anticipated resolutions in next 6-12 months. Improving visibility on sustenance of operating profit (>1.5% of assets), unlocking potential in subsidiaries and tempting valuations, more than outweigh near-term risks on equity dilution and industry-wide elevated credit costs. Maintain BUY with a target price of Rs255.
- Collection efficiency settles at best-in-class levels: Currently, 90.5% of its term loans (of Rs16trn) comprise customers meeting two or more EMI obligations implying 9.5% (Rs1.5trn) not paying any instalment, or only one EMI. Of this, 4.2% are in retail/SME (2% in home loans) and 2.2% in AAA and AA corporates - implying relatively low risk and more secured. Even including agri and working capital loans, interest deferral is ~11% of interest accrued (for Q1FY21) - suggesting agri/working capital is not adding >3% to overdue advances. As a proportion of respective sub-segments, this translates to ~6.5% less than two EMIs overdue loans for retail, SME, AAA & AA corporates and ~19% for A and below corporates.
- Accelerated specific credit cost; no need for contingency buffer: The bank made accelerated provisioning of Rs55bn towards HFC exposure (now 100% provided) and created Covid-related provisioning of Rs20bn on of SMA accounts of Rs133bn (100% interest + 15% principal) where it has received less than one EMI. Given that legacy accounts are adequately provided (corporate net NPLs of mere Rs105bn), recoveries of Rs110bn anticipated from resolutions (of steel, a couple of power and HFC exposures) in coming quarters and provision coverage of 67%, SBI does not feel the need to create Covid-related contingency buffer. Slippages (0.6%) in Q1FY21 were technical and may get upgraded post collection efforts. Given ongoing business disruption, we are conservatively building in credit cost of >200bps for FY21E.
- NIMs rebounded sharply: SBI has cut MCLR by 75bps post March (to 7%) and LDR ratio came off >400bps QoQ. Yet, it reported 30bps NIM expansion (benefitting from lower NPL drag and sharp cut in deposit rates). Going forward, deployment of surplus liquidity and resolutions may offset any downward pressure on NIMs.
- Cost agility and capital efficiency visible: Despite making Rs16bn of ad hoc provisions towards wage revision, employee cost increased ~9% YoY (~15% growth in FY20). Further impact of wage revision will be capped at Rs10bn. Also, operating expenses were curtailed sharply (down 8% YoY / 25% QoQ). In fact, contraction in loan- related fee income was not as stark as in others. Capital efficiency was visible with RWA/assets further contracting to 52% and profit accrual leading to 35bps rise in CET-1 to 10.14%. However, equity raising is imminent in the medium term.
Shares of STATE BANK OF INDIA was last trading in BSE at Rs.191.45 as compared to the previous close of Rs. 186.55. The total number of shares traded during the day was 6250526 in over 33874 trades.
The stock hit an intraday high of Rs. 194.9 and intraday low of 186.85. The net turnover during the day was Rs. 1198698537.