Profit surges, but needs higher Covid19 provisioning buffer
* SBI reported a PAT of Rs41.8bn (est. Rs31bn), aided by strong NIMs, low opex and oneoff gains of Rs15.4bn from the stake sale in the insurance subsidiary. However, cumulative Covid-19 provisions at Rs30bn (13bps of loans), including Rs18.4bn in Q1, are still lower than peers and thus, need to be shored up.
* The GNPA ratio improved 71bps qoq to 5.4% on lower slippages due to the standstill benefit. The moratorium rate on TL stood at 9.5% (customers who have paid more than two EMI) from 22% in Phase 1, but is not strictly comparable with other banks.
* SBI remains reasonably capitalized by PSB standards, with CET 1 at 10.1% and additional Tier I of 1.2%. Thus, management believes that there is no hurry to raise fresh equity capital unless the bank sees sustainable strong growth trajectory.
* We like SBI among PSBs for its strong liability profile, high retail orientation, reasonable capital position and cheap valuations (0.3x FY22E core ABV). We retain Buy/EW in EAP, with a revised TP of Rs240 (0.4x core Sep’22E core ABV + subs valuation of Rs131). Asset-quality momentum and MD transition remain key monitorables
Subdued credit growth but healthy NIMs:
Overall loan growth was subdued at 7.7% yoy due to continued corporate drag. Retail growth too moderated to 13% yoy. SME saw some traction due to the disbursement (Rs150bn) under the govt guarantee scheme. However, deposit growth was strong at 5.5% qoq/16% yoy, benefiting from the flight to safety. Global NIMs improved 4bps qoq to 3%, despite lower LDR, due to low NPA formation and high interest income from the reverse repo. However, interest accrued but deferred on loans under moratorium stood at Rs48bn. Margins may come under pressure in 2H as NPA recognition accelerates. Thus, to protect its NIM, the bank has consciously cut its savings rate to 2.75%, the lowest among large banks.
Headline asset quality/specific PCR improve, but need to shore-up provisions:
Gross slippages fell to Rs39bn (0.6%), which coupled with write-off (nearly ~ Rs200bn) reduced the GNPA ratio by 70bps qoq to 5.4%. For term loans (67% of loans), customers who have paid less than two EMIs are now at 9.5%, which are optically in line with peer private banks as it excludes customers who have paid more than 2 EMIs. As a prudent measure, the bank has fully provided Rs52.3bn for frauds against the quarterly requirement of Rs17.4bn. SBI increased specific PCR to 67% from 65% in Q4, however, Covid-19 provisions at Rs30bn (13bps of loans), including Rs18.4bn in Q1, is still lower than peers.
Outlook and valuation:
We have raised FY21 earnings estimates by 15%, factoring in better margins and one-off gains. We also raise FY22E earnings by 4%. We like SBI among PSBs for its strong liability profile, high retail orientation and reasonable capital position. Valuations (0.3x FY22E core ABV) also look attractive. We retain Buy/EW in EAP, with a revised TP of Rs240 (0.5x core Sep’22E core ABV + subs valuation of Rs131). Key risks: Higher-than-expected NPA formation and change in MD, which is traditionally associated with asset quality bump-up.
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