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SBI has answers for capital and ECL questions

Result Highlights

* Asset quality: Gross NPA additions amounted to Rs 34.58 bn (annualized NPA addition ratio of 0.4%) and recoveries and upgrades were healthy at Rs 42.0bn

* Margin picture: Whole bank NIM at 3.60% was up 10bps/45bps QoQ/YoY, sequentially higher due to yield on advances moving up faster than cost of deposits

* Asset growth: Whole bank advances grew 4.3%/16% QoQ/YoY driven sequentially by Corporate, Retail and Agri. loans

* Opex control: Total opex grew 22.3%/27.3% QoQ/YoY, employee cost grew 19.4%/40.3% QoQ/YoY and other operating cost rose 26.7%/12.1% QoQ/YoY

* Fee income: Core fee income grew/de-grew 35%/-0.2% QoQ/YoY, higher sequentially due to higher Loan processing fees and Misc. fee income.

Our view – SBI has answers for capital and ECL questions

Management alluded to ECL speculation being futile at this stage but assessed that, if implemented, the impact could be absorbed: The bank is carrying non-NPA provisions and, in the bank’s assessment, the incremental ECL provision impact would be much below this number, presumably, the non-NPA provision number of Rs 355.75bn stated on the presentation and that too, the said impact would be spread over 5 years.

* Management averred that the current capital provides sufficient headroom for normal growth: The CET1 ratio improved from 9.94% as of March 2022 to 10.27% as of March 2023 and the bank has, thus, been able to plough back profits and accrete capital. The bank’s current capital adequacy is sufficient to support Rs 7.1trn of loan growth without equity capital raise.

* Management guided for a loan growth of 12-14% in FY24: Regarding the international business, management explained that there will be huge manufacturing export happening from India. Hence, SBI’s focus on global presence is more of a strategic move to capture that prospective opportunity.

* Management stated that the bank does not have to grow deposits at a very fast pace: A key reason for this is significant excess SLR amounting to Rs 4 trn. The bank has had elbowroom to not hike deposit rates significantly and, in fact, did not hike deposit rates in the same manner as other players. There is still some cushion in terms of MCLR to move up.

* We maintain ‘Buy’ rating on SBI with a revised price target of Rs 795: We value the bank at 1.4x FY24 P/BV for an FY24E/25E RoE profile of 15.6/16.3%. We assign a value of Rs 208 per share to the subsidiaries, on SOTP.

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