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Growth better than expected; Margins improved

Result and Price Analysis

State Bank of India (SBIN) has delivered a strong result on operating and assets quality front. Reported gross slippages stood at ?24bn v/s ?97bn in the previous quarter. It’s reported GNPA (3.52% v/s 3.91% in 1QFY23) and NNPA (0.8% v/s 1.0% in 1QFY23) holds steady with stable PCR (incl. AUCA) of 92%. Furthermore SMA2 (7bps v/s 6bps) increased marginally. The bank has witnessed better than expected advance growth (21% YoY & 5% QoQ) led by growth across segments and steady deposit base (10.6% YoY & 3.4% QoQ) sequentially with better liquidity position. Moreover the bank has reported highest ever quarterly PAT of ?132bn (v/s ?62bn in 1QFY23) on the back of healthy NII (Domestic NIMs: 3.55%) and lower provision (credit cost: 28bps). The 2QFY23 calculated ROA and ROE stood at 1.04% and 17.4% respectively; surpassing the ROE target of 15%. The bank has established total standard asset and contingent provision of ~?298bn (101bps of net advances) as on 2QFY23. With improving operating environment, ample contingent buffer and strong growth outlook, we believe the annual ROE target of 15% is achievable in FY23-24E. Therefore, we recommend BUY with target price of ?718.

Gazing the core

Asset Quality improved; increase in SMA unlikely to cause worries: The bank’s slippages were suggestively lower sequentially at ?24bn (v/s ?97bn). Moreover, bulky recoveries and write-offs (?52bn and ?37bn respectively) led to decrease in GNPA ratio to 3.52% v/s 3.91% in the previous quarter. The bank’s asset quality improved meaningfully as reported GNPA/ NNPA/PCR ratio stood at 3.52%/0.8%/92% against 3.97%/1.0.2%/90% in 4QFY22. GNPA ratio of retail, agriculture, SME and corporate segment stood at 3.4%, 12.2%, 6.0%, and 5.3% respectively. Additionally, The Bank’s SMA 1 (?66bn, 22bps) and SMA 2 (?19bn, 7bps) inched up. Moreover, BB & below book decreased to 10% of wholesale book v/s 13% in 1QFY23. The restructured pool came down to ?273bn (93bps of net advances) from ?287bn (102bps) in the previous quarter. Management expects the pool to stay stable in near term.

On total restructuring, retail book accounted for ~55%. Retail restructuring was almost home loans and SME category and there was hardly any restructuring under Xpress credit cards. The provision towards restructuring (?78bn) stood around 30% of the restructured book which is quite similar to large private banks. The provisioning expenses of ?30bn (Credit cost: 0.28% v/s 0.61% in 1QFY23) was in line with expectations and carries ?20bn for loan loss provisions. Standard asset provisions worth ?1.25bn reported 2QFY23 against ?13bn has written back in the previous quarter. The bank has established total provision outside PCR of ~?298bn (101bps of net advances) as on 2QFY23.

Highest ever quarterly profit: Domestic NIMs (3.55%) up by 28bps sequentially. Management believes the NIMs to remain stable. YOA and COD stood at 7.66% and 3.84% against 7.43% and 3.80% in the previous quarter. Overall NIMs stood at 3.17%. It translated in 12.8% sequential growth in NII (351bn). Strong NII growth and lower opex. (C/I: 52% v/s 62% in 1QFY23) resulted in the PPOP growth of 66% sequentially. Lower loan loss provision (~?20bn v/s ~?43bn in 1QFY23) has translated in lower provision expenses of ?30.3bn v/s ?43.9bn in the previous quarter. Hence the net profit witnessed strong jump of 119% sequentially. The bank’s ROA/ROE (calculated, annualized) stood at 1.04% and 17.4% respectively; surpassing the ROE target of 15%.

Superior credit growth: The bank’s net advances stood at ?29.5tn; grew healthy by 20.8% YOY and 4.8% QOQ. Retail (42% contribution) and Agriculture (9.4% contribution) grew by 3.9% and 3.8% sequentially. Corporate (36% contribution) grew by 4.9% QoQ. Corporate credit witnessed a higher YOY growth due to higher capacity utilization and robust growth on system level. The bank’s investments are ~15.5tn of which ?9.3tn are HTM and ?6.2tn are AFS with modified duration of 1.9. Around 22% of loan book is linked to EBLR, 49% MCLR, 17% fixed rate and 0.24% are repo linked. The bank’s deposit stood at ?41.9tn grew steadily by 10.6% YOY and 3.4% QoQ. CASA ratio improved to 44.6% v/s 45.3% in 1QFY23. In 2QFY23, the bank’s CRAR 13.51% vs. 13.43% in the previous quarter with CET 1 of 9.53%. The bank does not expect capital raise from the GOI or from the market in the near term.

Outlook & Valuations

We expect the SBI to post a ROA/ROE of 0.9%/15% by FY24E led by healthy balance sheet growth along with higher PCR and stable asset quality. We recommend a BUY with target price of ?718 (potential upside of 21%). We value the standalone bank with PBV of 1.5xFY24E Adj. BVPS of ?379 and value of subsidiaries per share of ?149.

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