Published on 15/05/2019 10:56:35 AM | Source: Prabhudas Lilladher Ltd

Buy State Bank of India Ltd For The Target Rs.427 - Prabhudas Lilladher


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Operational challenges getting behind

Quick Pointers

* Relatively slower impairment and continued recoveries helped asset quality, while pushed towards higher coverage ratio in legacy NPAs

* SMA-1&2 loans dropped sharply to lower stress

SBI’s core performance was better off than expectations on back of higher other income led by continued strong recovery from a/c, decent NII and relatively good opex control. Earnings were dented on back of sharp provision rise based on ageing of certain legacy NPAs in the NCLT List -1 taking PCR to ~100%. Also, asset quality improved on back of lower slippages (Rs79.6bn or 1.6% of loans) v/s expectations and also incorporating few of the recent stress names. Going ahead, higher recoveries & lower slippages should improve asset quality, while better PCR of +60% (70% on corporate book and 93% on NCLT) should translate to normalization in credit cost, helping improve return ratios. We retain BUY with revised TP of Rs427 (from 361) based on 1.5x Mar-21 (rolled over from Sep-20) and Rs88 for subs.


* Strong top line helps core operations:

NII grew by 15.0% YoY (slightly lower than expectations), while other income was good on continued strong recovery from a/c and fees. Also, control in opex (despite wage/pension provisions) helped overall core PPOP growth of 10% YoY. Domestic NIMs of 2.95% (3.02% on quarterly basis) improved with positive bias on better loan mix dynamics playing out, but have not seen large improvements as deposit costs were also passed on to MCLRs and certain loan segments. Management expects NIMs (domestic) should improve to 3.25% in FY20 considering the recoveries, loan growth and pricing power of the bank.


* Loan growth improves led by retail; deposits growth steady:

Loan growth improved to 14% YoY in domestic with strong growth in retail of 18% YoY followed by corporate/SME of 13% YoY. Bank continues to retain higher share in retail products. On liabilities: Deposit grew by 7% YoY with CASA growing at 8% YoY and keeping mix steady at 45.7%. Bank has benefitted from external benchmarking of deposits and will continue to do so ahead until any guidelines emerge, and changes in rates will be transmitted to MCLRs.

* Stress lowering despite a few hiccups:

GNPA/NNPA came off by 120/90bps QoQ to 7.5%/3.0% in Q4FY19 with PCR improving to 62% v/s 57% in Q3FY19. Improvement was backed by relatively lower slippages than expectations of Rs79.6 bn (1.6% of loans), better recovery/upgrades and strategic w.offs. Important highlight was SMA-1&2 book more than halved to Rs77.6bn v/s Rs170.6bn or 0.4% of loans from 0.85% of loans sequentially and was on back of regularization of certain a/c in power sector. Net stress book stood at 3.4% of loans. With bank making sufficient provisions on legacy accounts and strong pipeline of recoveries, will reflect on earnings from normalization of credit cost towards 1.0%-1.4% band and improve core operations taking ROAs towards 1% in FY21.


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