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Healthy profitability with reasonable asset quality

* Q1FY22 operating performance beat estimates on healthy fees/treasury gains, but high provisions led to a 5% miss on PAT at Rs65bn (est. Rs68.4bn). Asset quality performance was mixed, with GNPA up 34bps qoq to 5.3% (led by retail/SME), restructured pool rising moderately to 0.8% of loans (pipeline at 0.1%) and SMA pool flat qoq at 0.5%.

* Credit growth was moderate at 6% yoy, dragged down by corporate. However, retail remained healthy at 17% yoy, driven by mortgages/car/xpress credit (PL). The corporate proposal pipeline is strong at Rs1.3trn mainly from Infra/steel and should drive growth gradually. This, along with healthy retail growth, should drive up LDR, in turn increasing NIMs/core RoA.

* SBI has already seen decent NPA clawback of Rs48bn in July with a pickup in collections, while restructuring should reduce SME NPAs. This, along with the transfer of NPAs to NARCL (Rs200bn/0.8% of loans) and resolutions via NCLT, should meaningfully bring down NPAs. We trimmed earnings estimates for FY22-23 by 5/3%, but expect the bank to deliver 13-15% RoE over FY22-24E (seen before AQR).

* Retain Buy/OW in EAP with a TP of Rs600, valuing core bank at 1.4x Sep’23E ABV and subs/investments at Rs185, leading to a 32% upside. SBI is the second best pick after ICICI, and we believe that better-than-expected growth/asset quality movement could provide further upsides to earnings/valuations.

Better growth, lower funding cost to drive margins:

Overall credit growth was moderate at 6% yoy/down 0.7% qoq due to corporate drag. However, retail growth was healthy at 16.5% yoy, in turn led by mortgages (up 11% yoy), xpress credit (up 34% yoy), and auto (up 6% yoy, where SBI intends to establish a leadership position). Margins slipped 12bps qoq to 2.9% mainly due to lower LDR and interest reversal (Rs8bn). However, we expect SBI’s NIM to improve, led by better growth/LDR, higher portfolio orientation toward retail and sustained cost advantage.

NPAs inch up in Q1, but set to moderate led by better recoveries/NARCL transfer:

Gross slippages were elevated at Rs163bn (retail Rs53bn, SME at Rs64bn). However, the bank has been able to claw back NPAs to the tune of Rs48bn (29% of slippages in Q1) already in July and should see more reversal in NPAs as collection trends improve. Fresh restructuring was contained at Rs53bn, taking the cumulative pool to Rs182bn (retail 40%, corporate 42%), 0.8% of loans, with an additional pipeline of Rs21bn, (0.1% of loans, retail 87% and SME 13%). Specific PCR slipped to 68% from 71% in Q4, but the Covid-related contingent buffer improved to Rs91bn, 0.4% of loans. SMA 1 & 2 (>Rs50bn a/cs) remained flat qoq at Rs113bn, 0.5% of loans, which is positive. SBI expects higher recoveries (Rs140bn)/transfer to NARCL (Rs200-220bn) during the year, which should further bring down corporate NPAs.

Outlook and valuation:

We trim our earnings estimates for FY22-23 by 5-3% but expect SBI to deliver 13-15% RoE over FY22-24E (seen before AQR). We like SBI among PSBs for its strong liability profile, high retail orientation, reasonable capital position, and sharply improving RoA/RoRWA/RoE, given renewed focus on profitability while maintaining market dominance and portfolio quality. Retain Buy/OW in EAP with a revised TP of Rs600, valuing core bank at 1.4x Sep’23E ABV and subs/investments at Rs185. Key risks: macro-slowdown and delay in corporate/retail credit demand; sharp rise in G-sec yields hurting treasury; and delay in corporate resolutions.

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