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Gaining momentum in earnings; asset quality outlook strong

SMA/Restructured portfolio under tight control

* State Bank of India (SBIN) reported a steady quarter, with an earnings beat of 12% on MOSLE. This was aided by controlled provisions despite a challenging environment. Core operating performance was in-line.

* Asset quality ratios deteriorated marginally on elevated slippage in Retail/SME. However, the management clarified that slippage worth ~INR48b has already been recovered/upgraded in July’21. Furthermore, the total restructured book remained in check, while SMA 1/2 (exposure of >INR50m) was stable QoQ at INR113b (~0.5% of loans).

* The bank is gaining momentum in earnings every quarter. Thus, we estimate SBI to deliver FY22/FY23 RoE of 13.1%/14.6%, even as we build in credit cost of 1.6%/1.3% for FY22E/FY23E. Maintain BUY, with revised TP of INR600 (1.4x FY23E ABV + INR193 from subs).

Controlled provisions aid earnings beat; slippage led by Retail/SME

* SBIN reported 1QFY22 PAT of ~INR65b (55% YoY growth; 12% above estimate), aided by lower provisions (20% YoY decline) v/s our estimate. NII growth was weak at 3.7% YoY (4% miss), with domestic NIM up 4bp QoQ to 3.15%.

* Other income grew 24% YoY, supported by a one-off recovery and FX income. Treasury gains for the quarter stood at INR21b. Opex grew 13% YoY, and the C/I ratio thus stood at 51.9% (v/s 50% in 1QFY21 and 54.5% in 4QFY21). Overall, PPoP grew 5% YoY (in line with estimate).

* Advances growth came in at 5.8% YoY (~1% QoQ decline), with retail credit up ~16% YoY, led by Xpress Credit (34% YoY) and gold loans. On the other hand, corporate loans declined ~2% YoY (~3% QoQ decline), impacted by lower utilization rates. Deposits grew ~9% YoY, with domestic CASA up ~11% YoY. Therefore, the CASA mix stood at ~46% (stable QoQ).

* Asset quality ratios deteriorated marginally due to elevated fresh slippage of INR156.7b (annualized slippage ratio of ~2.6%), largely from the Retail/SME portfolio. However, the management clarified that slippage worth ~INR48b has already been recovered/upgraded in July’21. Thus, the GNPA/NNPA ratio increased 34bp/27bp QoQ to 5.32%/1.77%, while PCR stood at 67.9% (v/s 70.9% in FY21).

* Total loans restructured in the 2.0 framework stood at INR52.5b, while another INR20.6b is expected to get restructured in the coming months. Thus, the overall restructured book stood at INR203b (~0.8% of loans), while the SMA 1/2 pool (exposure of >INR50m) was stable QoQ at INR113b (~0.5% of loans) – this bodes well for asset quality trends in the coming quarters.

* Subs performance: SBI Card reported PAT of INR3.05b (better than estimated). SBI Life Shareholders’ PAT declined ~43% YoY on account of higher death claims settled during the quarter. AMC reported PAT growth of 30% YoY to INR2.4b. SBI General’s PAT was down 44% YoY.

Highlights from management commentary

* Collection efficiency for July stood at 93.5% (v/s 92% in June’21).

* Total recovery in July’21 from the current quarter slippage was around INR47.9b. Furthermore, nearly INR23b was upgraded in the SME segment.

* The overall target is to reach RoE of 15%.

Valuation and view

SBIN reported steady performance in a challenging environment, with strong earnings led by controlled provisions. However, business trends were modest, impacted by the lockdowns. Asset quality remains broadly on track despite elevated slippage, led by Retail/SME. However, restructuring and the SMA pool remain in check. We expect slippage to subside going ahead, assuming there is no third COVID wave or no severe impact from it.

Overall, PCR remains healthy at ~68%, and it also holds unutilized COVID provisions of ~INR91b. The bank is well on track to keep credit costs in check. We maintain our estimates for FY22/FY23 and project RoA/RoE of 13.1%/14.6%. Maintain BUY, with revised TP of INR600 (1.4x FY23E ABV + INR193 from subs).

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