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Par for the course, ex-recoveries
SBIN’s 3Q earnings were significantly ahead of estimates as recoveries boosted core earnings and contributed to a reduction in provisions. Adjusted for this, the qtr was par for the course. Maintain BUY with an SoTP of Rs 418 (1.3x Dec-21E of ABV of Rs 241 + Rs 105 sub value).
HIGHLIGHTS OF THE QUARTER
* NPAs Stable, Even As Slippages Spike: Higher recoveries and upgrades (~Rs 136bn, 2x/3.5x YoY/QoQ, aided by recoveries in ESSAR and other NCLT cases) kept GNPAs (Rs 1.6tn, -15/-1%; 6.9%) in check even as slippages jumped 3x/2x to ~Rs 201bn (3.7%). This incl. ~Rs 70bn of SBIN’s exposure to DHFL and ~Rs 30bn on the devolvement of a power exposure. Akin to its peers, SBIN continued to see pain in its Agri book (GNPAs increased ~32/5% to ~13.8%). SBIN saw a reduction in its SMA book to 37bps (~Rs 81bn). The news on this front remains mostly good. We are circumspect of SBIN’s significant exposure to stressed sectors that is still ‘standard’. Nevertheless, we continue to model an asset quality improvement with a moderation in slippages (~2.25% over FY20-FY22E).
* Recoveries Aid Margins: Margins expanded ~51/16bps to 3.27%, aided by a surge in recoveries and a slight fall in the CoD (-12/-5bps). Adjusted for the interest recognition on recoveries, margins dipped QoQ. This comes after surprising NIM growth seen in 2Q (when there were no one-offs). We have factored NIMs at 3.2% over FY 20-22E.
* YoY loan growth slowed to ~8% (vs. ~10% in 2Q), with a YoY dip in corporate and SME loans. Moderate growth in agri loans was observed at ~6/4% and retail (~31% of loans) continued to be the main driver of growth at ~18/5%. We expect SBIN’s loans to grow at ~9% over FY20-22E. A large base would limit faster growth.
SBIN’s 3Q is not extraordinary if earnings are adjusted for the impact of the large recoveries (recoveries nevertheless). These were on expected lines. Standard exposure to vulnerable sectors remains a source of potential stress. However, we expect the extent of incremental stress to be considerably lower than before. Calc. PCR at ~64%, will enable a reduction in LLPs and hence improvement in RoAEs. This, along with undemanding valuations underpins our stance.
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