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Published on 15/06/2020 2:35:08 PM | Source: Emkay Global Financial Services

Buy State Bank of India Ltd For Target Rs. 225 - Emkay Global

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Moderate show; lower Covid-19 provisions tad disappointing

* SBI reported moderate PAT of Rs35.8bn (est. Rs47bn) due to lower NIMs, higher staff costs and specific LLP, partly offset by one-off gains from SBI Cards stake sale (Rs27bn). However, lower Covid-19 provisions at Rs9.4bn/ 4bps vs. 30-60bps by peers is disappointing.

* The GNPA ratio improved 79bps qoq to 6.15%, benefiting from standstill asset classification (Rs62bn). Nearly 22% customers have availed moratorium (23% in TL) v/s 10-12% for Axis in April 20, but the bank did not provide comparable moratorium in value terms and remains relatively optimistic on asset-quality momentum.

* We prefer to remain conservative and thus build-in higher NPAs/LLP, which coupled with lower growth and one-off gains, lead to 50-56% cut in FY21/FY22 estimates. We expect RoA/RoEs to dip to 0.2%/4% in FY21, but to gradually improve back to 0.5%/10% in FY23.

* We like SBI among PSBs given its strong liability profile, higher retail orientation and reasonable capital position, while valuations (0.3x FY22E core ABV) also look attractive. Retain Buy/EW in EAP with a revised TP of Rs225 (0.6x core FY22E core ABV + subs valuation of Rs109). Asset-quality momentum and MD transition remain key monitorables

 

* Subdued growth; NIM slips qoq:

Overall loan growth was subdued at 6.4% yoy due to continued corporate/SME drag, while retail growth too moderated to 15%. However, deposit growth remains strong at 11% yoy/4% qoq, but SA momentum was relatively moderate (4% qoq) vs. some large private peers amid flight to safety post the Yes Bank debacle. The bank’s global NIMs declined 8bps to 2.97% due to the sharp 65bps fall in domestic NIMs, which in turn was mainly due to lower LDR, interest reversal on agri NPAs and absence of lumpy resolution like Essar Steel in Q3. Amid aggressive lending rate cuts, the bank has consciously cut its savings rate to 2.75% (the lowest in large banks) to protect its NIM.

Headline NPA improves, but lower Covid-19 contingent provision buffer is disappointing:

Gross slippages were lower at Rs83bn due to the absence of lumpy corporate NPAs, but agri NPAs were far higher at Rs52bn. This, coupled with standstill asset classification benefit on loans under moratorium to the tune of Rs62bn, led to lower GNPA ratio at 6.2% (down 79bps qoq). As per number of customers, overall moratorium rate is 22% (only comparable to Axis Bank at 10-12% as at April-end), while in Home loans it stood at 20%, PL at 5%, corporate loans at 13% (7% in value) and 43% in SME. However, unlike other banks, SBI did not provide loans under moratorium in value terms (though it claims to be surprisingly lower than in volume terms). In addition to this non-disclosure, lower Covid-19 provisions at Rs9.4bn/4bps vs. 30-60bps by peers is disappointing, despite strong one-off gains.

Outlook and valuation:

We like SBI among PSBs given its strong liability profile, higher retail orientation and reasonable capital position, while valuations (0.3x FY22E core ABV) also look attractive. Retain Buy/EW in EAP with a revised TP of Rs225 (0.6x core FY22E core ABV + subs valuation of Rs109) vs. Rs300 earlier (1.0x core FY22E ABV + subs valuation of Rs107). Key risks to our call: Higher-than-expected NPA formation and change in MD which is traditionally associated with asset quality bump-up.

 

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