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‘Stress under control; profitability to remain strong’

* State Bank of India (SBI) reported strong profitability at Rs6,504 cr during Q1FY22 which was up by 55.2% YoY and 0.8% QoQ, supported by low provisioning and contained OPEX. NII growth remained modest weighed down by weak interest income, though decline in interest cost partially offset the impact. NIM was reported at 2.9% in Q1FY22.

* Asset quality modestly weakened during quarter as GNPA rose by 34 bps QoQ to 5.3%. Deterioration in assets quality was on expected line given the disruptions caused by Covid 2nd wave. While, slippages was sequentially reduced to Rs157 bn (slippages rate of 2.6%) in Q1FY22 compared to Rs221 in Q4FY21, but overall trend remained on higher side over the past two quarters. Better recovery and write-off led to marginal increase in GNPA despite higher slippages. One third of the slippages came from the retail book largely from secured, but bank indicated strong recovery of Q1 slippages during Jul. Collection efficiency improved from 92% in Jun to 93.5% in Jul.

* SBI’s restructuring book stood at Rs200 bn or 0.8% of loans seems under control additionally higher standard provisioning (1.2% of loans) and low non-NPA stress provides comfort on assets quality front. Although slippage rate in FY22 is likely to hover near 2%, strong recovery rate with the unlocking of economy to keep credit cost under control thereby providing boost to profitability.

* Advances growth picked up 5.8% YoY driven by strong retail credit growth. Underlying demand in retail segment remained strong, while corporate credit growth is also expected to pick up on account of improved capacity level and likely strong pipeline of corporate proposals. As CoF stabilizes at lower level, pick-up in advances growth to boost NIM.

* Higher slippage was on expected lines as collection efficiency was impacted by Covid 2nd wave. Though recovery has been remained robust in Q2 with easing of economic restrictions. Profitability is expected to remain strong with contained credit cost and pick up in credit growth.

* We maintain ‘Buy’ rating on stock with revised target price of Rs535. Standalone business is valued at Rs360 derived at P/ABV1.15xFY23E, while subsidiaries are valued at Rs175.

Contained OPEX, low provisioning boost profitability

NII grew by a modest pace of 3.7% YoY due to weak interest income which declined by -1.4% YoY. Interest cost declined by -4.8% YoY which provided support to NII. NIM was reported at 2.9% in Q1FY22. Low C/D at 65.4% and pressure on yield impacted margin. Other income grew by 24.3% YoY on strong treasury gains. C/I ratio improved to 51.9% in Q1FY22 v/s 54.5% in Q4FY21 due to contained OPEX. Provisioning declined by -19.6% YoY which provided boost to profitability. Net profit grew by 55.2% YoY and 0.8% QoQ to Rs6,504 cr in Q1FY22

Credit growth improves led by retail segment

Gross advances grew by 5.8% in Q1FY22 (4.8% in Q4FY21) led by strong expansion in retail credit at 16.5% YoY. Within retail segment, home loans grew by 11% YoY, auto at 5.8% YoY and other retail at 31% YoY. SME grew by 2.0% YoY, agri at 2.5% YoY while corporate credit declined by -2.3% YoY. Deposits grew by 8.8% YoY and CASA ratio stood at 46%.

Valuation and View

Advances growth picked up 5.8% YoY driven by strong retail credit growth. Underlying demand in retail segment remained strong, while corporate credit growth is also expected to pick up on account of improved capacity level and likely strong pipeline of corporate proposals. As CoF stabilizes at lower level, pick-up in advances growth to boost NIM. Higher slippage was on expected lines as collection efficiency was impacted by Covid 2nd wave.

Though recovery has been remained strong in Q2 with easing of economic restrictions. Profitability is expected to remain strong with contained credit cost and pick up in credit cost. We maintain ‘Buy’ rating on stock with revised target price of Rs535. Standalone business is valued at Rs 360 derived at P/ABV1.15xFY23E, while subsidiaries are valued at Rs175.

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