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On a strong footing; raising target price

We believe SBI should deliver a) healthy core-PPOP growth in FY23E/FY24E (21% CAGR over FY22-24E) led by gradual improvement in NIMs, b) lower credit costs (0.7%/0.8% in FY23E/FY24E) and c) strong loan growth of 16% over FY22-24E. We see continued outperformance (25%/13% vs. Nifty over 1yr/6m) given that it is a key beneficiary of the uptick in systemic credit growth. SBI has protected its asset/liability market share over the last 5 years and with increasing signs of stronger corporate credit demand emerging, we see SBI as one of the best placed banks to ride the upturn. Incrementally, as repo rate hikes percolate through asset mix beginning 2Q23, we see concerns on NIMs (esp. after 1Q23 dip) abating given that SBI continues to hold its healthy SA pricing and trajectory on deposit growth improves. Credit costs should remain under control (avg. credit costs of 75bps over FY23/FY24) given continued focus on risk, low BB & below portfolio and steady asset quality esp. in Xpress Credit. SBI is currently trading at 1.2x NTM P/BV (for the core banking business) and we see greater probability of the bank trading closer to 1-SD above its longterm valuation average (LTA 1.0x, 1-SD 0.3x) as witnessed in FY11-13. We value the core banking business at 1.3x FY24E P/BV (vs. 1.0x currently) and we arrive at our revised SoTPbased target price of INR660. Maintain BUY.

* Key beneficiary of systemic credit uptick: In our view, SBI is a key beneficiary of the systemic uptick in credit demand, especially led by corporate credit growth witnessed in YTDCY22. With increasing signs of momentum continuing in corporate demand and a potential capex upturn in FY24, we believe SBI is one of the best-placed participants in the sector. Though share of retail loans has gone up over the last few years (36% of loans in 1Q23 vs 31% in FY20), we see gradual increase in the corporate credit share incrementally. The share of unsecured loans (Xpress Credit) (as a % retail loans) has also increased to 25% (vs 19% in FY20) and given that large proportion (c.95%) of the borrowers in this segment are salaried employees and government employees, GNPA has been limited to 0.8% (1Q23). We expect SBI’s loan growth to outpace industry growth; we build in loan growth of 16% over FY22-24E. Deposits growth for SBIN has lagged loan growth which is in-line with industry trend and now as we enter a seasonally strong 2H along with a steady demand environment, we could see the race for deposits getting hotter (link to our earlier report); we believe SBI’s liability strengths should continue to hold it in good stead partly also aided by low-CD ratio (70% as of 1Q23).

* Healthy asset quality; NIMs to expand: SBIN has navigated through Covid exceptionally well, GNPA/NNPA/restructuring have improved to 3.9%/1.0%/1.0% (-142bps/-77bps/- 1bps YoY). We do not foresee any material asset quality risk and expect NPA ratios to improve further, thus we expect credit costs to be limited and build in credit costs of 0.7%/0.8% in FY23E/24E. While NIMs decline in 1Q23 came in as a negative surprise, we expect margins to improve on account of re-pricing of loans (impact to be seen 2Q23 onwards) and deployment of excess liquidity (LCR has come down to 138.1% (vs 159.5%) and we believe there is still headroom for improvement). While, the bank has increased term deposits rate in certain buckets based on the ALM situation, there are noplans to increase SA rate at present. We build in NIMs (calc) of 2.9%/3.0% for FY23E/24E. Also, share of international loan book (a lower NIM business) is likely to be restricted to <15% which should see incremental pressure on NIMs easing.

* Valuation and view: SBI’s core fundamentals continue to be on a strong footing and improvement in systemic growth should drive incremental re-rating for the stock in our view. 1Q23 witnessed a blip in margins, which, in our view should normalize going ahead with the bank’s liability franchise being amongst the best in the sector. While the bank may need to raise equity capital over the next 12-24months (CET1), stake sale in subsidiaries (SBI Funds, SBI General Insurance) remains another option to augment capital and may delay the eventual dilution. Even at current valuations, the capital raise will be BVPS accretive and thus we are not overtly concerned. We raise our SoTP-based target price to INR 660 to reflect our revised estimates and expect SBI to trade closer to 1-SD over its long-term valuation averages. Maintain BUY.

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