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Strong top-line growth: State Bank of India posted its Q4FY23 results in line with the expectations as net interest income (NII) increased by 29.5% YoY/6.1% QoQ to Rs 40,393cr. The growth in net interest income was on account of improvement in net interest margin (NIM) by 44bps YoY to 3.84% in the quarter while yield on advances saw an increase of 52bps to 8.1%. Interest expended saw a rise of 32.9% YoY/8.3% QoQ as cost of deposits stood at 3.99%, an increase of 16bps YoY.

Increased profitability and return ratios: PAT for the quarter increased significantly by 83.2% YoY/17.5% QoQ to Rs 16,695cr which was due to decline in provision by 54.2% YoY/42% QoQ as asset quality improved. Operating expense grew by 27% YoY/22% QoQ due to increase in expenditure in technology and also retrial benefits to employees. RoA improved by 49bps to YoY to 1.23% while RoE stood at 19.43%.

Advances/deposits growth in line with industry: SBI’s advances increased by 16% YoY with domestic advances growth at 15.4% YoY which was led by retail personal and SME segment. The credit demand remains broad based as the management is seeing demand from both retail and corporate side. The growth is expected to sustain in the long run and management expects growth of 12%-14% in FY24E. Deposits saw a decent growth of 9% YoY which was driven by term deposits growth of 11.5% YoY. CASA growth remained subdued at 5% YoY. The increase in term deposits was mainly due to repricing of deposits rate upwards which made it more attractive. We remain positive on the advances/deposit growth of the bank in estimates and expect growth at 14%/10% CAGR over FY23-25E.

Asset quality continues to improve: GNPA/NNPA stood at 2.78%/0.67% as it declined by 119bps/35bps YoY which is the lowest in the last 10 years. Along with decline in NPA, provision coverage ratio (PCR) improved by 135bps YoY to 76.4%. Slippage ratio stood at 0.4% in Q4FY23 while credit cost improved by 23bps in FY23 to 0.32%. The improvement in asset quality can be attributed to the banks underwriting practices and strengthening of its risk management system.

Valuation: We remain positive on the bank on the back of its increased profitability, decline in provision and NPA due to improved asset quality and better return ratios. The bank is seeing traction in credit demand while its credit to deposit ratio remains low to accommodate the increasing demand. The bank has strengthened its internal system of underwriting which is evident in its sustainable growth. We estimate NII/Pre-provision operating profit (PPOP)/PAT to grow at a CAGR of 18%/12%/14% over FY23-25E. We maintain Buy rating with a target price of Rs 677 valuing the bank at 1.3x of its FY25E ABV.

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