Published on 13/07/2020 11:40:09 AM | Source: ICICI Securities Ltd

Add State Bank of India Ltd For The Target Rs.206 - ICICI Securities

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Alluring valuation; economic/social costs a risk

State Bank of India’s Q4FY20 earnings are characterised by depressed NIM (at <3%) and muted NII growth (flat YoY) offset by lower than anticipated credit cost and sustained asset growth. Relatively lower vulnerability on asset portfolio (assessed by our SAAP framework) is reaffirmed by lower moratorium percentage (across product categories –detailed below). Unlike other banks, SBI has not created any Covid-19-related contingency buffer (taking shield under higher coverage of 84%). However, post assessment of the situation and better visibility, provisioning is likely in H1FY21. Inarguably the strongest and superior franchise on deposits, underwriting, digitisation, etc., huge potential to unlock value in subsidiaries, and operating profit at 1.7-2.0% of assets will help SBI manage stress. However, further risk to NIMs (MCLR cut by 50bps post March), low CET-1 at 9.7% (posing equity dilution risk) and being in the forefront to bear the brunt of economic/social obligations will cap rerating upside despite alluring valuations and robust franchise. Maintain ADD. (TP -Rs206) (Old TP –Rs185)

* Moratorium percentage reaffirms SBI’s better profile than peers: Moratorium has been offered to all customers (opt-out); however, 82% of them have paid two or more instalments as at May-end. In retail, 21% of customers availed of moratorium (20% for home loans –in line with HDFC –and 5% for unsecured lending). In corporate book, only 13% of customers (7-8% by value) have availed of moratorium (much lower than peers), and in SMEs 47%. However, this analysis is based purely on number of customers (not on value) and agri segment is not covered. Under CGTSME scheme (up to Rs1.5trn of SME lending is eligible), of Rs300bn that can be offered, 30% by value (Rs100bn) has already been disbursed

Agri slippages play spoilsport: Slippage run-rate of 1.5% (Rs83bn) came in line with our expectations as moratorium benefit protected Rs62bn of SMA-1/2 accounts (1.1% run-rate) being classified into NPLs. However, agri segment accounted for ~60% of it with agri NPLs touching the 15% mark (hopefully largely recognised now). Besides, interest income reversals of 25-30% on two crop cycles also dragged NIMs lower by 15-20bps. Going forward, SBI being proxy to the Indian economy, macro slowdown/stress would reflect on its portfolio. Post assessing the situation, SBI will start providing from Q1FY21 onwards, in our view. Despite strong coverage, we are building-in a credit cost of >200bps for FY21E.

NIMs to settle lower:SBI has cut MCLR by 50bps post March (to 7.25%) and LDR ratio will come off (with moderation in loan growth), though deposits would flock to this superior franchise). This,coupled with incremental stress due to Covid-19 crisis, will offset the benefit from sharp cut in deposit rates, and NIMs would hover low at sub-3%.

* Inarguably strongest and superior franchise:SBI is relatively better placed on asset profile given that 39% of its corporate lending is to PSUs/government, 77% to ‘A’ & above rated corporates, >60% of retail book is low-risk mortgages, >95% of unsecured lending is to government/PSU employees, and <4% of its loans is to severely affected Covid-19 sectors. Thisprofile, coupled with operating profits at 1.7-2.0% of assets, will help SBI manage stress better than other PSU banks. However, we see upside being capped due to risks related to bearing the brunt of any social obligation/cost and BV-dilutive equity raising (given low CET-1 at 9.7%).


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