Inexpensive valuations. BUY
SBIN’s 1Q was ahead of estimates across fronts, aided by margin improvement, high treasury gains, and lower provisions. Asset quality improvement was optical, and COVID-19 provisions seem inadequate. Our conservative earnings estimates, consequently, remained mostly unchanged. Asset quality trends and capital raising (given SBIN’s weak capital base and RoAE profile) should be watched for. The term of SBIN’s current chairman is set to end in Oct-20, which creates additional uncertainty. However, SBIN has one of the strongest deposit franchises, and this, along with inexpensive valuation, drives our BUY rating (SoTP value of Rs 286).
1QFY21 highlights: After a steep 18% QoQ fall in 4QFY20, NII grew 17% QoQ, 11.9% ahead of estimates. PPOP was 2.2% lower QoQ, but 11% ahead of estimates. PAT grew 81.2/17% and was ~19% ahead of our estimates.
Deposit traction: At 16/6.5% YoY/QoQ, deposit growth was strong (despite the rate reduction), aided by 15.4/5.4% TD growth and a 17/8% SA growth. Strong QoQ deposit growth is not common for SBIN in 1Q and is indicative of polarisation in the deposit market, from which SBIN stands to benefit.
Asset quality and moratorium trends: GNPAs dipped 23/13% to ~Rs 1.3tn (5.4%). However, this improvement is optical, as slippages (68bps) were depressed by the standstill classification benefit, and write-offs were elevated (+27.5/20.8%). The management expects corporate recoveries of the order of Rs 100-120bn in 2HFY20, where the bank has 100% coverage. As per the management, 9.5% (vs. 24% earlier) of the total book was under moratorium. Despite the sharp drop in the moratorium, we continue to factor elevated slippages of ~3.3% over FY21-22E.
Non-tax provisions: At Rs 125bn (+36.1/-7.4%), non-tax provisions were surprisingly low. SBIN made ~Rs 18.4bn of COVID-19 related provisions in 1Q, taking the total stock of such provisions to Rs 30bn (just 13bps of advances). We believe that these provisions are insufficient, especially given SBIN’s asset quality track record. We expect non-tax provisions to average 1.96% of loans over FY21-22E.
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