Buy State Bank of India Ltd For Target Rs. 530 - Motilal Oswal
Robust asset quality; earnings set to gain pace
Slippages at record low; credit cost guidance appears conservative
* SBIN reported a strong 4QFY21, with GNPA/NNPA ratio improving to 4.98%/1.5% (v/s pro forma GNPA/NNPA of 5.44%/1.81% in 3QFY21), aided by benign slippages (lowest in the past 20 quarters barring the period of moratorium/SC prohibition). Slippages stood at 1.2% of loans (much better than other large Banks) in FY21, with impeccable Retail asset quality (slippages at 0.5% of loans). Restructured book stands at 0.7% of loans, well within the management’s guided range.
* The bank is making strong progress on earnings normalization (FY21 RoE of ~9.3%). We expect it to deliver FY22E/FY23E RoE of 13.9%/15%, even as we build in credit cost at 1.6%/1.1%. We maintain our BUY rating with a revised TP of INR530/share (1.1x FY23E ABV+INR187/share from subsidiaries)
Slippages at a record low; PCR improved further to ~71% (~88% including TWO)
* SBIN reported a PAT of ~INR64.5b in 4QFY21 (up 80% YoY; 16% below our estimate), largely affected by higher interest reversal of ~INR21b and interest on interest refund of INR8.3b on account of the SC waiver order. This resulted in an 8% miss to our NII estimate. Domestic margin fell 23bp QoQ to 3.11%. NII/PPOP/PAT grew 13%/5%/41% YoY in FY21.
* Growth in other income was broadly muted (flat YoY), despite recovery of ~INR40b from Bhushan Power & Steel, affected by treasury loss of INR370m as the bank booked higher treasury gains of INR32.4b (including stake sale in SBICARD) in 4QFY20. Opex grew 16% YoY, led by INR15b of provisions towards wage arrears and provisions towards pension and gratuity. C/I ratio stood stable QoQ at 54.5%. PPOP grew 7% YoY.
* Net advances grew ~3% QoQ, with Retail loan growth (+5% QoQ) led by Home loans (4%QoQ), Xpress Credit (36% YoY), and Gold loans, while Corporate loans grew 4% QoQ. Deposit growth remains strong (~14% YoY), with domestic CASA growing ~16.7%. The CASA mix stood ~46.1% (v/s 45.2% in 3QFY21)
* Asset quality remains robust, with GNPA/NNPA ratio improving to 4.98%/1.5% (v/s pro forma GNPA/NNPA of 5.44%/1.81% in 3QFY21). The same came in better than estimated as fresh slippages in 4QFY21 stood ~INR54.7b (0.9% of loans). Fresh slippages stood at INR286b (1.2% of loans) in FY21 v/s INR496b (2.3% of loans) YoY. This is a significantly better performance than our expectation. Retail asset quality remains impeccable, with total slippages of ~INR33b (0.5% of loans) in FY21. Total restructuring remains under control and stands at INR178.5b (0.7% of loans). Total slippages and restructuring stood at INR464b (1.9% of loans), well within the management’s guided range of INR600b. SMA 1/2 portfolio declined to ~INR115b (v/s INR179.5b in 3QFY21).
* Performance of its subsidiaries: SBICARD reported a PAT of INR1.7b (below our estimate). The same for SBILIFE was muted YoY at INR5.3b. However, APE growth was robust at 46% YoY (7% above our estimate). AMC business reported strong (170% YoY) PAT growth at INR3.6b (FY21 PAT growth of 43%). PAT grew 31% for SBI General in FY21.
Highlights from the management commentary
* Disbursement under ECLGS stood ~INR250b (of which ECLGS 2.0 is INR22b).
* Collection efficiency in the domestic loan book stood at 95%/96% in Apr'21/May'21.
* Credit cost in FY22 will largely be towards MSME and Agri sector as the Retail book remains resilient. The bank already has 85% coverage on its Corporate portfolio. Its credit cost guidance of less than 2% appears conservative.
Valuation and view
SBIN reported a strong 4QFY21 in a challenging environment. Deposit growth stood strong, led by healthy CASA trends, while loan growth is likely to recover gradually over FY22-23E. Asset quality outlook remains particularly encouraging, with record low slippages and controlled restructuring book. Slippages in FY21 stood at 1.2% v/s 2.3% during FY20. Retail asset quality was impeccable for SBIN, with slippages significantly lower v/s peers. The management has prudently improved PCR to ~71%. It holds unutilized COVID provisions of ~INR63b. The bank is well on track to keep credit cost under control. We maintain our FY22E/FY23E estimates and project RoA/RoE of 0.8%/15% by FY23E. We maintain our BUY rating with a revised TP of INR530/share (1.1x FY23E ABV+INR187/share from subsidiaries).
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