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Growth better than expected; MTM losses dragged profitability

Result and Price Analysis

State Bank of India (SBIN) has delivered an expected result on operating and assets quality front. Reported gross slippages stood at ?97bn v/s ?28bn in the previous quarter. It’s reported GNPA (3.91% v/s 3.97% in 4QFY22) and NNPA (1.0% v/s 1.02% in 4QFY22) holds steady with stable PCR (incl. AUCA) of 90%. Furthermore SMA2 (6bps v/s 2bps) increased marginally. The bank has witnessed better than expected advance growth (15.8% YoY & 3% QoQ) led by retail credit growth and flat deposit base (8.7% YoY & negative 0.1% QoQ) sequentially with better liquidity position. Moreover the bank has reported PAT of ?61bn (v/s ?91bn in 4QFY22) on the back of bulky MTM losses which was expected and muted NII (Domestic NIMs: 3.26%). The 1QFY23 calculated ROA and ROE stood at 0.48% and 8.3% respectively. Management reiterated the target ROE of 15% in mid run. The bank has established total standard asset and contingent provision of ~?292bn (104bps of net advances) as on 1QFY23. With improving operating environment, ample contingent buffer and strong growth outlook, we believe the ROE target of 15% is achievable in mid run. Therefore, we recommend BUY with target price of ?642.

Gazing the core

Asset quality stable; increase in SMA unlikely to cause worries: The bank’s slippages were higher sequentially at ?97bn (v/s ?28bn). However, bulky upgrades and recoveries (?52bn and ?36bn respectively) led to decrease in GNPA ratio to 3.91% v/s 3.97% in the previous quarter. The bank’s asset quality stay stable as reported GNPA/NNPA/PCR ratio stood at 3.91%/1.0%/90% against 3.97%/1.0.2%/90% in 4QFY22. GNPA ratio of retail, agriculture, SME and corporate segment stood at 3.7%, 13%, 6.6%, and 5.9% respectively. Additionally, The Bank’s SMA 1 (?52bn, 18bps) and SMA 2 (?18bn, 6bps) inched up. Moreover, BB & below book increased to 13% of wholesale book v/s 11% in 4QFY22. The restructured pool came down to ?287bn (102bps of net advances) from ?310bn (113bps) in the previous quarter. Management expects the pool to stay stable in near term.

On total restructuring, retail book accounted for ~53%. Retail restructuring was almost home loan and SME category and there was hardly any restructuring under Xpress credit cards. Technically, tenure extension is for 18-24 months under restructuring, but bank might see customers paying back earlier than envisaged. The provision towards restructuring (?78bn) stood around 26% of the restructured book which is quite similar to large private banks. The provisioning expenses of ?43bn (Credit cost: 0.61% v/s 0.49% in 4QFY22) was in line with expectations and carries ?42.7bn for loan loss provisions. Standard asset provisions worth ?13bn has written back in the quarter. The bank has established total provision outside PCR of ~?292bn (1.4bps of net advances) as on 1QFY23.

Profitability dragged on the back heavy MTM losses; however it was expected: Domestic NIMs (3.23%) down by 13bps sequentially. Management believes the NIMs to remain stable. YOA and COD stood at 7.43% and 3.80% against 7.58% and 3.83% in the previous quarter. Overall NIMs stood at 3.02%. It translated in sequential flat NII (312bn). A significant MTM loss dragged other income by 80% QoQ. Muted NII growth and MTM losses resulted in the PPOP de-growth of 35% sequentially. Standard provision write back has translated in lower provision expenses of ?43.9bn v/s ?72.4bn in the previous quarter. Hence the net profit de-grew by 33.4% sequentially. The bank’s ROA/ROE (calculated, annualized) stood at 0.48% and 8.33% respectively. Management reiterated the target ROE of 15% in mid run aided by a) increasing credit growth, b) normalization of credit cost, and c) improving operational performance

Superior credit growth: The bank’s net advances stood at ?28.1tn; grew healthy by 15.8% YoY and 3% QoQ. Retail (42% contribution) and Agriculture (9.4% contribution) grew by 3.2% and 2.4% sequentially. Corporate (36% contribution) grew by 0.4% QoQ. Corporate credit witnessed a higher YoY growth due to higher capacity utilization on system level. At the end of 1QFY23, ECLGS outstanding stood at ?310bn. The bank’s investments are ~15.2tn of which ?8.8tn are HTM and ?6.4tn are AFS with modified duration of 2.1. The bank’s deposit stood at ?40.5tn grew steadily by 8.7% YoY; however, 0.1% de-growth in sequential basis. CASA ratio stood at 45.3%. Domestic NIMs (3.23%) down by 13bps sequentially. Management believes the NIMs to remain stable. YOA and COD stood at 7.43% and 3.80% against 7.58% and 3.83% in the previous quarter. Overall NIMs stood at 3.02%. It translated in sequential flat NII (312bn). A significant MTM loss dragged other income by 80% QoQ.

Outlook & Valuations

Under base case scenario, we expect the bank 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 BUY with target price of ?642 (potential upside of 21%). We value the standalone bank with PBV of 1.3xFY24E Adj. BVPS of ?379 and value of subsidiaries per share at ?149.

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