Buy State Bank of India Ltd For Target Rs. 538 - Yes Securities
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Sure‐footed move to higher return ratio trajectory; Result Highlights:
* Asset quality: Reported slippages for 4QFY21 imply new slippages worth Rs 54.73bn for the quarter, which means SBI closes 2HFY21 with slippages far lower than guided for.
* Margin picture: Whole bank NIM declined 22 bps QoQ to 2.90% due to interest reversals and ‘interest on interest’ refund
* Asset growth: Advances grew 3.4%/5.3% QoQ/YoY driven by retail loan growth of 4.8%/16.5% QoQ/YoY
* Opex control: Non‐provision salary expenses jumped 35.9%/35.0% QoQ/YoY mainly due to arrear payments
* Fee income: Fee income rose 58.1%/7.4% QoQ/YoY mainly on the back of higher loan processing charges.
Our view – SBI has made a sure‐footed move to a higher return ratio trajectory
Significantly lower slippages than guidance augur well from an asset quality standpoint:
Net increase in pro forma slippages in 3QFY21 was Rs 20.71bn, implying the total new slippages in 2HFY21 was Rs 75.44bn compared with prior guidance of ~Rs 200bn. Furthermore, restructuring requests received till 4QFY21‐end have amounted to Rs 178.52bn, implying an additional restructuring of Rs 113.57bn made during 2HFY21, which is also well within the guidance of ~Rs 130bn additional restructuring by 3QFY21‐end.
Sequential margin shrinkage is optical since, adjusted for interest reversals and ‘interest on interest’ refund, NII would have expanded 4.2% sequentially: Interest reversals due to recognition of pro forma slippages amounted to Rs 21.27bn whereas interest on interest refund amounted to Rs 8.31bn. Management conceded that deposit rates have bottomed out but would strive to maintain them at current levels.
Retail loan growth at SBI was driven by ‘other’ retail loans i.e. mainly unsecured personal loans and gold loans: Home loan growth was reasonable at 4.0%/10.5% QoQ/YoY whereas auto loan growth was slower at 0.5%/5.0% QoQ/YoY. Other retail loans rose 7.3%/33% QoQ/YoY.
We maintain ‘Buy’ rating on SBI with a revised price target of Rs 538:
We value the standalone bank at 1.0x FY23 P/BV for an FY22E/23E RoE profile of 11.2%/13.5%. We assign a value of Rs 177 per share to the subsidiaries on the basis of SOTP.
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