State Bank of India - Further rerating contingent on RoA reflation - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities and Mr. Deepak Shinde, Institutional Research Analyst, HDFC Securities

State Bank of India's (SBI) Q1FY22 earnings surprised (26% higher than our estimates) due to higher income from recoveries. SBI continued to surprise positively on the asset quality front for a third straight quarter with slippages at 2.8% (annualised), better than private banks (AXSB: 4.5%; ICICIBC: 4.2%). The incremental restructuring during the quarter was at ~0.2% of loans. With the back-book adequately provided for (PCR at 68%), and ~0.4% of loans as a COVID buffer, we expect normalisation of credit costs in H2FY22 (assuming no third wave). Loan growth was soft (+6% YoY) on account of muted economic activity, although the bank indicated a robust pipeline of undrawn limits in the corporate book. SBI's journey to a 1% potential RoA is contingent on the bank finding ways to reflate its core profitability (PPOP stagnant at ~1.8% of assets over the past 8 quarters), especially by way of higher asset yields (soft in Q1FY22 that reflected fewer deployment opportunities, a low-risk corporate portfolio and a mortgage-heavy retail book). We maintain BUY with a revised target price of INR 501 (earlier INR 490), valuing the standalone bank at 1.0x Mar'23 ABVPS - this revision reflects the valuation of listed subsidiaries.

Margins yet to reflate, strong other income drives PPOP beat: SBI reported muted NII growth of 4% YoY due to muted loan growth of 6% YoY and~10bps compression in NIM (at 2.92%). Fee income remained broadly steady, while other income included lumpy recoveries of INR 24bn. Opex-to-assets ratio remained steady at ~1.9% of assets.

Slippages better than peers; provisioning to normalise: SBI's slippages surprised positively at 2.8% (annualised), lower than Axis Bank and ICICI Bank (>4%), although the underlying portfolio profitability is significantly different. ~93% of fresh slippages emerged from outside the corporate book (SME at 9.1%, Agri at 5.7% and Retail at 2.6%). The restructured portfolio is at 0.8% of loans, while SMA1+2 remained steady at 0.5% of loans. SBI expects reversals of a majority of slippages from home loans, personal loans, and SME segments during Q2FY22, as collections and recoveries were hindered during the quarter. We build in ~2% average slippages during FY22-FY23E.

aReflation in yields; higher credit deployment imperative for 1% ROA: SBI delivered 0.6% RoA during the quarter. PPOP-to-assets has hovered around~1.8% for several quarters, as the reflation in asset yields remains elusive (loan book skewed towards high-rated entities and home loans marginally offset by Xpress credit loans). Even assuming credit costs at 0.7% of loans in a best- case scenario, SBI's journey to a 1% RoA is contingent on consistent reflation in asset yields through gradual portfolio re-risking (without adding to credit costs) and better operating efficiencies.

Shares of State Bank Of India, was last trading in BSE at Rs. 441.85 as compared to the previous close of Rs. 457.05. The total number of shares traded during the day was 3082205 in over 48598 trades.

The stock hit an intraday high of Rs. 462.6 and intraday low of 438.5. The net turnover during the day was Rs. 1379737522.

Source : Equity Bulls

Keywords