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Treasury drag behind; earnings set to soar

Core operating performance on track to meet its RoE aspirations

* SBIN reported a 14% YoY growth in core PPOP. However, higher treasury losses (INR65.5b) dented earnings, which declined 7% YoY to INR60.7b.

* NII stood a tad weaker. However, the outlook remains encouraging as the bank benefits from the re-pricing of its floating rate loan portfolio, amounting to 74% of total loans. We expect NII to grow at an average 16% over FY22-24.

* Despite a rise in fresh slippages to INR101b, the GNPA/NNPA ratio declined marginally by 6bp/2bp QoQ to 3.91%/1% in 1QFY23, led by recoveries and upgrades. The restructured book fell to 1% of loans.

* A higher than expected treasury loss resulted in a marginal cut to our FY23 earnings estimate. However, we expect SBIN to report a strong earnings progression right from 2QFY23, resulting in 29% earnings CAGR over FY22-24. We estimate a RoA/RoE of 0.9%/17% in FY24. SBIN remains one of our conviction Buy in the sector.

Decline in margin transitory; asset quality improves in a seasonally weak quarter

 * SBIN reported a 7% YoY decline iPAT to INR60.7b (20% miss to MOSLe) in 1QFY23, impacted by adverse MTM losses of INR65.5b. NII grew 13% YoY (4% miss). Domestic NIM fell 13bp QoQ to 3.23% as there was an interest income of INR6b on an income tax refund in 4QFY22.

* Other income fell 80% YoY to INR23b, resulting in a total revenue of INR335 (15% miss), due to an adverse MTM. Core fee grew at 18% YoY.

* OPEX was flat YoY, while PPOP fell 33% YoY to INR127.5b. However, core operating profit grew 14.4% YoY to INR193b.

* Gross advances grew 14.9% YoY and 2.9% QoQ, led by a 9%/3% QoQ growth in international loans/Retail book. The SME book grew 2.4%, while the Agri and Corporate book was flat QoQ. The growth in international loans was led by syndicated debt and trade finance, while Xpress Credit/Home loans led the show in the Retail portfolio. Deposits grew 9% YoY (flat QoQ), with the CASA mix up 5bp at 45.3%. The bank aspires to increase market share in current account deposits to boost its CASA ratio.

* Despite a rise in fresh slippages QoQ to INR101b, the GNPA/NNPA ratio fell marginally (by 6bp/2bp) to 3.91%/1% in 1QFY23, led by recoveries and upgrades of INR52b and write-offs of ~INR36.6b. Restructuring loans fell 7% QoQ to INR288b (1% of loans), while the SMA 1/2 portfolio grew 97% to INR69.8b. PCR ratio was steady at 75% (90.1% including AUCA)

* The strong performance of its subsidiaries: SBICARD reported a PAT of INR6.3b (up 106% YoY). The same for SBILIFE grew 18% YoY to INR2.6b. PAT for the AMC business was flat on a YoY basis at INR2.5b. SBI General reported an 83% YoY rise in PAT to INR1.4b in 1QFY23.

Highlights from the management commentary

* The international business book grew 15% YoY in USD terms, led by syndicated debt and trade finance, mainly in the US and the UK.

* RoA fell 9bp YoY to 0.48% (not annualized) due to a MTM impact. Excluding this impact, notional RoA/RoE stood at 0.89%/18.75%.

* Digital traction continues, with strong growth metrics in YONO. The bank is on track to maintain its digital leadership.

Valuation and view

SBIN has delivered a modest 1QFY23, dragged by higher MTM losses of INR65.5b and a slight decline in margin. However, strong control on OPEX enabled a 14% YoY growth in core PPOP. Loan growth was strong, and the bank expects to sustain the momentum with Retail being the torch bearer. Stability in the rate environment is averting any further MTM losses. The high mix of floating loans, which will benefit from a re-pricing of loans, will support NII and the overall earnings trajectory in coming quarters. Its asset quality performance was stable, with a marginal improvement in headline asset quality, despite a seasonally weak first quarter, while the restructured book remains under control at 1%. We expect credit cost to moderate to 0.9%, enabling 29% earnings CAGR over FY22-24. We expect the bank to deliver a FY24E RoA/RoE of 0.9%/17%. SBIN remains our conviction Buy in the sector. We revise our TP to INR625 (1.2x FY24E ABV and INR202 from subsidiaries).

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