Published on 19/09/2020 10:33:25 AM | Source: ICICI Direct

Buy State Bank of India Ltd For Target Rs.215 - ICICI Direct

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Benefits of scale, lower moratorium turning positive…

SBI reported a strong operational performance with NII surging 16% YoY, whole bank advances up 8.6% YoY and Morat 2.0 at under 10%. SBI reported 9.5% of term loans in Morat 2.0 from 21.8% (by borrowers) and 23% (by value of term loans) in Morat 1.0. Total provisioning for the quarter was at | 12501 crore, which includes Covid-19 provisioning of | 1836 crore only, lower than other large banks.

Total Covid provision of ~| 3,000 crore as on June 2020 looks lower for SBI. The bank made 100% Covid provision on interest and 15% on principal in SMA accounts where less than two EMIs have been paid.

Loan growth was in line at 6.6% YoY to | 23.85 lakh crore. However, including CP, corporate bonds, etc, growth was 8.6% YoY, pushing NII. Retail (personal) advances grew 12.85% YoY and foreign office advances by 11.9% YoY. Home loan, which constitutes 22% of the bank’s domestic advances, has grown 10.72%, moderating from 13.86% YoY in Q4.

Deposits grew 16% YoY to | 34.9 lakh crore, boosted by savings deposit (up 17% YoY, 8% QoQ). CASA ratio improved 18 bps QoQ to 45.34%.

Net interest income (NII) grew 16% YoY, 17% QoQ to | 26641. Global net interest margin (NIM) surged 4 bps QoQ to 3.01% in this tough environment boosted by credit growth and lower cost of deposits (down 46 bps QoQ). Domestic NIM rose to 3.24% from 3.19% QoQ. SBI Life stake sale led to gain of | 1540 crore in P&L. PAT at | 4190 crore grew 81% YoY, 17% QoQ.

Asset quality surprised positively with slippages at of | 3637 crore vs. | 8105 crore QoQ led standstill on moratorium. GNPA saw a dip of 13%QoQ to | 129661 crore from |149092 crore. Consequently, GNPA ratio fell 71 bps to 5.44% from 6.15% QoQ while NNPA ratio fell 37 bps QoQ to 1.86%. Overall PCR ratio increased QoQ to 86.32% from 83.62%.


Liquidity inflow, lower provisions to boost earnings

SBI is a beneficiary of liquidity with huge deposit inflow in these uncertain times of Covid-19. Also, stake sale in strong subsidiaries like SBI Cards, SBI Life boosted capital, avoiding equity dilution. Provisions for legacy stress is nearly over but Covid-19 may keep credit cost elevated. High deposit growth for SBI may stay in near term. Expect loan CAGR at ~7.5% & deposit CAGR of 8.4% in FY20-22E to | 26.9 lakh crore, | 38.1 lakh crore, respectively. We expect PAT at | 13700 crore, | 23300 crore in FY21E, FY22E, respectively.


Valuation & Outlook

Legacy book being provided for, wage provision needs also limited and scope for NIM expansion augur well for the bank’s future earnings. Covid19 provisions and hangover of Yes Bank are keeping the stock performance muted. Expect return ratios at RoA at 0.5% and 9.1% RoE by FY22E. We maintain HOLD with a target price at | 215, valuing the stock at 0.7x FY22E ABV standalone bank and assigning subsidiaries value of | 80 post holding company discount. The MD’s tenure ending by October 2020 may create some anxiety in the stock.


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