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Credit quality trajectory bolsters confidence; improved visibility towards new normal

The trend in net NPA of 5.7%/3.0%/2.2%/1.5% and credit cost of 3.8%/2.7%/1.9%/1.8% over FY18/19/20/21, bolsters our confidence on State Bank of India’s (SBI) credit quality trajectory and demonstrates its resilience during the pandemic. The bank’s Q4FY21 performance not only beats our expectations, but is superior to many private banks reaffirming our bullish stance with noteworthy positives: i) FY21 slippages at 1.2% with Q4FY21 slippages at sub-1% and restructuring at 0.7% of advances; ii) credit cost contained at 1.8% (despite some contingency and accelerated provisioning); and iii) improved traction in retail credit (16% YoY growth) – that too, directed towards a better-rated customer profile. NII set in lower due to interest derecognition and ‘interest on interest’ reversal.

Overhead costs too hovered high (up 22% YoY / 34% QoQ), but was offset by fee income and stress recoveries. Superior FY21 performance and improved visibility on operating profit (>1.5% of assets) with new normal credit cost trajectory, will drive RoE to ~15% by FY23E and valuations to 1.3x book. We therefore revise our target price to Rs 544 (earlier: Rs 468) and maintain BUY on the stock. With >35% targeted upside, SBI is our top pick in the space. Key risks: 1) Second wave of covid, if prolonged, can weigh on credit cost; and 2) Lower than expected credit growth.

* FY21 slippages settle at 1.2% despite pandemic – well below the guided range:

In addition to proforma slippages of Rs165bn, additional actual slippages of Rs54.7bn in Q4FY21 took cumulative slippages for full year FY21 to Rs285.6bn. This translates into a slippage run-rate of 1.2%, almost 100bps lower than the FY20 slippage ratio of 2.2% and also lower than the 1.3% for 9MFY21. Commendably, despite FY21 being a pandemic year, retail slippage ratio was contained at a mere 0.44% in FY21 vs 0.7% in FY20. Management indicated that 7-89 DPD bucket collection efficiency was sustained at 95- 96% even in Apr/May’21.

* Restructuring capped at <75bps – well below initial estimate:

Restructuring requests for Rs179bn (0.73% of advances) settled much lower than guidance of <1%. Of this, corporate segment was at Rs117bn, retail at Rs40bn and SME at Rs21bn. On potential restructuring under 2.0, the situation is still evolving and we have to wait and watch how corporate, SME and retail customers are responding. SBI has Board-approved policy and structure in place, but it is difficult to quantify the potential extent at this moment.

* Recoveries and provisioning buffer to cushion credit cost:

Recoveries and upgrades of Rs43bn and write-offs of Rs86bn in Q4FY21 offset incremental slippages pulling GNPAs down to 4.98% (5.44% in Q3FY21). Credit cost thereby was contained at <1.75% (Rs103bn) in Q4FY21, thereby exiting FY21 with 1.8%. Resolutions are also underway for a few chunky accounts. This, coupled with specific provision coverage at 71%, covid provisions at Rs63bn, standard assets provisions of Rs140bn and other provisions of Rs49bn (~104bps of advances) suggest adequacy of provisioning. This will lower the burden on credit cost in coming quarters. We are building-in slippages at 1.5%/1.3% and credit cost at 1.4%/1.1% for FY22E/FY23E respectively.

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