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Banking PSU Giant

Background: SBI is India’s largest and oldest public sector bank and financial institution with balance sheet size of ~Rs 52 tn. The bank has a market share of 23% in advances and 25% in deposits in domestic scheduled commercial banks. It is recognized as domestic systemically important bank by the RBI.

Vast and diversified asset book: SBI has the biggest asset loan book of ~Rs 30 tn which consists of retail, corporate, SMEs and agri. We expect the asset book with grow at CAGR of 13% of the period FY22-FY25E.

Deposit: The bank has one of the efficient CASA ratio of 44.6% as on Q2FY23 compared to its public sector peer. We expect the bank to maintain its CASA ratio in the estimates and will grow at a CAGR of 11% for the period FY22-FY25E.

Earnings: The bank has healthy NIM margin of 3.6% compared to its public sector peers. The increasing interest curve will further improve the margin. Further, the decline in provisions due to improving asset quality will further help the bank to improve its profitability.

Valuation: We remain positive on the bank on the back of its credit demand from retail and corporate. Further, the asset quality has been improving constantly. We initiate coverage on SBI with a BUY rating and our SOTP based price target stands at Rs 677 (~1.3x FY25E P/ABV) representing an upside of 14.6%.

Risks: 1) Declining asset quality will impact the profitability in the future and increase NPAs 2) Changes in interest rates, foreign exchange rates, equity prices will decrease the NIM 3) Exposure of advances in priority lending sector and corporates

Strong Legacy, Largest Network and Nation Builder

State Bank of India (SBI) is India’s largest and oldest multinational, public sector bank (PSB) and financial services institution with a balance sheet size of ~52 trillion. The Bank has a strong portfolio offering distinctive products & services for individual, corporate, SMEs, rural and government. The bank is known as banker to every Indian due to its largest deposits, advances, customers, ATMs and branches. The bank has 23% market share in advances and 25% market share in deposits. It as 20% share in Indian GDP. The bank is a market leader to government projects and significantly contributes towards initiatives taken by the government of India. SBI is recognized as domestic systemically important bank by the RBI since 2015. The bank has the widest presence in the country with a total of 22,309 branches and 65,796 ATMs as on Q2FY23. The bank is present in 31 countries with 227 offices. This wide network helps to penetrate deeper in the rural markets which gives the bank an edge over its peers. Along with its non-banking subsidiaries and association with JV companies, it offers wide range of financial services such as insurance (life and general), credit cards, payment services, broking, asset management, primary dealership, investment banking, supply chain and cluster financing. The subsidiaries are leaders in their respective industry and add tremendous value of the parent company. The bank underwent many mergers and acquisition cycle in the years 2008, 2010 and 2017. The government of India (GoI) holds 56.92% stake in the banking company.

The bank has been striving on improving its operating efficiencies, improving its asset quality and strong liability franchise. With retail : corporate mix of 64%:36% as on Q2FY23 it has cautiously and gradually transformed itself as retail banking entity from 58%:42% mix in FY18. The credit demand is strong as bank saw a 20% YoY increase in advances in Q2FY23. The bank has healthy CASA compared to its public sector peers. We believe the healthy CASA ratio will continue in the estimates compared to its public sector peers. In terms of its asset quality, the Gross NPA and Net NPA are at all time all time low at 3.5% and 0.8% respectively. The loan books improved rating wise as well with 81% of the loans above A ratings. The bank is also moving towards increasing its operational efficiencies with improvement in cost-to-income ratio, cost to assets ratio and also improving deposits/advances per branch. The banks RoA % has seen constant growth from 0.25% in Q1FY20 to 0.8% in Q2FY23. Following similar trend, the RoE % has also grown consistently from -4% in FY18 to 16.1% in Q2FY23.

Sector Overview

The banking sector in India has shown impressive performance post pandemic due to rise in credit demand, increase in household investments, rise in corporate capex, capital requirements from MSMEs, regulatory reforms and improvement in asset quality. As per RBI’s financial stability report the credit demand was at a decadal high at 17.4% YoY, such demand was last observed in 2011. Deposits recorded some moderation as it registered a growth of 9.4% YoY. While current and savings account (CASA) growth moderated, term deposits attracted customers due to increasing interest rates. Almost all the banks fulfilled the minimum capital requirements prescribed by the RBI indicating strong capital base

Net Interest Margin (NIM%) improved due to rise in interest rate and we expect rates to increase in short to medium term. NIM improved by 20bps between Sept-22 and Sept-21 on account of faster rate in loans rates compared to deposit rate in rising interest rate scenario coupled with reduction in credit cost.

On asset quality front, the gross NPA continued to decline at a seven year low of 5% in Sept-22 and net NPA stood 10-year low at 1.3%. The quarterly slippage ratio showed sign of improvement due to considerable improvement by public sector banks. We remain cautious on loans disbursed to retail sector. Lenders have been very cautious on lending loans to ‘BB and below’ category.

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