Asset quality disappoints; expect gradual recovery over FY19E
* SBIN reported a weak quarter, with slippages spiking up to INR267.8b (adversely impacted by divergence) and revenue missing estimate by 4%. Provisioning increased to INR188.8b, resulting in a loss of INR24.16b. However, on a positive side, 89% of the corporate slippages came from stressed assets, resulting in a decline in net stressed assets to 8.4% of total loans.
* Core PPoP held stable (1% QoQ growth), led by modest growth in core other income, while NII growth stood flat on a sequential basis. Operating expenses grew 3% QoQ, led by a rise in employee costs, as management provided toward potential wage increase. SBIN continues to see a net reduction in its employee base (down by 8,708 over the past six months).
* Loan growth was muted at 1.3% QoQ due to a continued run-down in large and mid-corporates, even as retail advances grew 3%/14% QoQ/YoY. SME portfolio showed some signs of revival, with 6% QoQ growth. Margins improved 2bp QoQ to 2.45%, aided by a stable CASA mix and re-pricing of the deposit portfolio. SBIN guided for 10% advances growth over FY19E.
* GNPLs/NNPLs increased by 7%/4.6% QoQ, adversely impacted by a divergence amount of INR232.3b. GNPL/NNPL ratios, thus, increased 52bp/18bp QoQ to 10.35%/5.61%. The PCR ratio improved 120bp QoQ to 48.6% (65.9% including technical write-offs). The bank has made 60% provisions on its aggregate NCLT exposure of INR783.1b (39% of total GNPLs). SBIN guided for 2% slippage and credit cost each for FY19. We expect asset quality to improve from FY19E onward and expect net NPL ratio to decline to 2.7% by FY20E.
* Other highlights: a) SBIN reversed revaluation reserves amounting to INR112.1b in respect of certain leasehold properties. This contributed to a 66bp QoQ fall in Tier-1 to 10.3%. The bank also recognized DTA of INR22.8b.
* Valuation view: While core portfolio performance remains healthy, the purging of the residual stressed assets will remain an overhang in the near term. We cut FY18E/19E/20E earnings by 75%/20%/22%, and build in capital infusion of INR88b, as announced by the government. We revise our PT to INR375 (1.4x FY20E ABV for bank) and maintain our Buy rating.
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