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Balance sheet fortification continues; earnings to gain pace

Subs remain strong compounders

* State Bank of India (SBIN)’s Annual Report highlights “Resilience,” ”People,” and “Technology” as the key theme, with the endeavor to continuously strengthen the balance sheet and improve return ratios. The bank has continued to invest in cutting-edge technology to maintain its position among the most digitally savvy banks.

* The focus has remained on building a superior loan book, while maintaining strong underwriting – as evident from the robust asset quality across retail segments. This is primarily attributable to >95% of unsecured credit being offered to government/PSU employees and ~41% of corporate loans being offered to PSUs / govt. undertakings.

* On a segmental basis, the Corporate segment has reported profits after four years of consecutive losses. On the other hand, Retail PBT has declined 48% YoY, impacted by pandemic-led provisions.

* On the digitalization front, YONO continues to set new records with ~80m downloads and ~37m+ registered users, with average daily logins of ~10m. In FY21, YONO was further extended to overseas customers with the onboarding of ~40k customers and INR213b/INR457b worth of personal/gold loans was disbursed. SBIN has 13.2% market share in POS terminals, 29.2% in debit card spends, and 25.8% in mobile banking.

* Despite a challenging year, SBIN has continued to report higher improvement in asset quality v/s private peers, with PCR improving to 71% (85% on the corporate book). Controlled restructuring (0.7%) and a low SMA book (0.5%) provide further comfort on asset quality and would drive a sustained reduction in credit cost. Maintain BUY, with TP of INR530 (1.1x FY23E ABV + INR188 from subs).

Building a superior loan book, with a strong focus on underwriting

SBIN’s focus has been on building a granular and high-quality loan portfolio, with Retail being a key growth driver. Within Retail Loans, Home Loans / Xpress Credit grew ~11% YoY / 37% YoY and Gold Loans was up ~4.6x to ~INR210b. Growth in Xpress Credit is primarily driven by YONO, and the total size stands at ~INR1.93t – it is the largest player in the Personal Loans segment. The GNPL ratio in the Xpress Credit segment stands at just 0.36% as >95% of the unsecured retail credit is offered to government / PSU employees. On the corporate side, ~75% of loans are rated A & above, while ~41% of loans are toward PSUs / government undertakings.

Corporate segment reports profit after four consecutive years of loss

Segmental profitability highlights that while revenues in the Corporate segment declined 9% YoY, the bank reported PBT of INR51b in Corporate Banking. The segment turned profitable after reporting loss for four consecutive years, contributing 16% to the total profits. Retail PBT declined 48% YoY and contributed ~30% to the total profits, impacted by higher provisions, as revenue growth came in flat YoY. In Treasury, the bank reported PBT of INR171b (led by gains from the stake sale of SBI Life), which contributed ~54% to the total segmental profits.

Mix of Doubtful/Loss NPLs rises to 39%, signifying low aging provisions

The mix of Loss and D-3 assets combined has increased to ~39% (v/s ~10% in FY18). This signifies the diminishing requirement of aging provisions and higher recovery prospects from fully provided / written-off accounts. SBIN now has 85% coverage on its corporate portfolio, while overall PCR at 71% stands much higher than what is required as per the ECL methodology.

Building strong digital capability; YONO gaining scale rapidly

SBIN has garnered major market share across multiple digital channels, such as 13.2% in POS terminals, 29.2% in debit card spends, and 25.8% in mobile banking. YONO continues to set new records, with ~80m downloads and ~37+m registered users, with average daily logins of ~10m. In FY21, YONO was further extended to overseas customers, with ~40k customers on-boarded. ~94% of eligible savings accounts were opened up through YONO (~5.2m). It sanctioned 1.2m digital loans worth INR196b, and ~1.4m pre-approved personal loans worth INR213b were opened in FY21. Furthermore, ~INR457b gold loans were sanctioned through YONO.

Balance sheet cleaning continues; recoveries remain strong

Despite a challenging year, SBIN continues to report improvement in asset quality, with PCR improving to 71% (85% on the corporate book). Controlled restructuring (0.7%) and SMA 2 book (0.3%) provide further comfort on asset quality and would drive a sustained reduction in credit cost. Total recoveries (including those from the AUCA book) remain strong, with normal recoveries at ~61%. A significant portion of recoveries also come from Compromise (30%), in addition to NCLT.

Sectoral GNPAs show improving trends; priority sector

NPA still high GNPAs for the non-priority sector declined to 3.6% in FY21 (from 4.8% in FY20), led by decline in the Services sector to 3.2% (from 4.4%). For the priority sector, the GNPA ratio moderated to 9.4% from 10.7%. This was due to decline in Agriculture GNPA to 15.2% from 16% and in Industry GNPA to 12.1% from 18.5%.

Subs remain strong industry-leading compounding machines

SBIN’s subsidiaries – SBI MF, SBI Life Insurance, SBI General Insurance, and SBICARD – have displayed robust performances and turned market leaders in their respective segments. The contribution of subsidiaries to the SOTP has increased significantly – they now contribute ~35% to the SOTP (~44% on CMP). We expect the robust performances from subs to continue and add value to the overall SOTP. Value unlocking from SBI MF and SBI General Insurance could result in further gains.

Valuation and view

The bank has reported a strong FY21 in a challenging environment. Deposit growth stood strong, led by healthy CASA trends, while loan growth is likely to recover gradually over FY22–23E. The asset quality outlook remains encouraging, with the slippage ratio lower than many private banks. SBIN has prudently improved PCR to ~71% and holds unutilized COVID provisions of ~INR63b. SBIN has reported FY21 RoE of ~9.5% – the highest since the AQR was commenced in FY16 – and now aims to reclaim 15% RoE in the medium term. Thus, we project RoA/RoE of 0.8%/15% by FY23E and reiterate SBIN as our top BUY, with TP of INR530 (1.1x FY23E ABV + INR188 from subs).

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