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Is 450 the new 250?

Enablers in place to drive best-in-class business performance

* SBIN continues to strengthen its Balance Sheet and improve return ratios. The focus remains on building a superior loan book, while maintaining strong underwriting as evident in lower stressed assets and higher PCR. This has aided in a sustained turnaround in operating performance and will drive return ratios to long-term average and possibly higher.

* With a high share of floating-rate loans at 75%, the bank remains well-placed to ride the rising interest rate environment. While Retail helped clock growth in loans in recent quarters, the bank is witnessing a sharp recovery in Corporate book, reflected by a improving utilization ratios.

* SBIN reported further improvement in asset quality, with PCR improving to 75% (93% in the corporate book). Controlled restructuring (1.1%), lower SMA pool (13bp), and 100% coverage on the SR portfolio provide comfort and would keep credit costs in check (estimate credit cost to remain controlled at 1% in FY24).

* SBIN reported a RoE of 13.9% in FY22 – the highest since FY16. With several enablers in place, it appears well positioned to surpass the 15% RoE threshold in FY23 and FY24. We maintain our conviction BUY rating with a TP of INR600.

Gaining market share in loans; improving utilization lends further confidence

Over the last few years, the bank is gradually gaining market share in loans. While PSU Banks, in aggregate, lost 1,130bp in market share in loans over the last four years, SBIN is an outlier with a 90bp gain to 23%. Utilization levels improved by ~860bp to 31% in the Wholesale book, while Retail growth remains steady at ~15% YoY in FY22. Within Retail loans, Xpress Credit is the fastest growing segment and offers a long runway of growth. While we estimate loan growth to sustain at 13% CAGR over FY22-24, we are reasonably confident of SBIN growing ahead of the market, further improving its loan market share.

Robust liability franchise and low C/D ratio puts SBIN in an enviable state

Deposits grew 10% YoY to INR40.5t in FY22. SBIN remains an unbeatable deposit machine, with a deposit market share of 24.6%. The bank has gained 170bp in market share in deposits over the last four years. With a steady CASA ratio of ~45% in FY22, the cost of deposits (reported) has moderated to 3.8% in FY22 from 5.1% in FY19. As interest rates rise, we expect the bank to pass on some benefits to deposit holders and estimate cost of deposits at 4.2% in FY24. In addition, the C/D ratio, at 67.5% (peak of 86% over the past decade), is significantly lower than top private peers and system C/D ratio of ~72%. The domestic C/D ratio of the bank stands even lower at 66.7% as of FY22. The combination of these two factors will limit the increase in funding cost and hold the bank in good stead in a rising interest rate environment.

NIM to improve on steady credit growth and a higher mix of EBLR loans

SBIN has a higher mix of MCLR, floating rate, and EBLR loans (75% of total), which puts it in a favorable position to support margin in a rising rate environment. Interest rate reset on floating rate loans is much faster as compared to the rise in interest cost on deposits, which usually happens with a lag. The Weighted Average Lending Rate (WALR) on fresh loans for PSU Banks saw a rise of 37bp MoM in May’22. We expect Banks to gradually increase their lending yields as RBI has raised the repo rate by 90bp over the last two months, and the full impact of the same will be visible in 2QFY23. With a higher share of floating rate loans and being the largest Public Sector Bank, SBIN will be a beneficiary of a rising rate trajectory.

Bank to drive incremental value v/s subsidiaries, thereby gaining share in SoTP valuation

Over the past few years, increasing customer awareness about various financial products has enabled SBIN’s subsidiaries to continuously gain scale, thus helping them emerge as market leaders in their respective segments. As a result, market multiples witnessed a strong expansion and the contribution of subsidiaries to overall SoTP rose to 40% at the peak from 17% five-years ago. At present, SoTP contributes 33% to our TP. We believe the incremental value will be driven by core banking operations as the bank continues to deliver robust earnings CAGR (28% over FY22-24E), thus enabling it to achieve a RoE of 16.7% by FY24E. The performance of its subsidiaries has been under pressure owing to a challenging macro-environment.

Best-in-class SMA, positions SBIN well for the volatile macro environment

Controlled slippages (1%) and negligible SMA book (13bp) place SBIN in an enviable position and allows the bank to handle macro challenges with greater ease. The management’s continuous focus on improving underwriting capabilities has begun to yield results and is reflected in resilient asset quality. GNPA/NNPA ratio declined to 4%/1% in FY22, while PCR increased to 75% (93% on the Corporate book). Higher provisions on stressed accounts (100% on SREI and Future Group) place SBIN well, while a high AUCA book at INR1.73t, with recoveries in the 4-11% range, will limit overall provisions. We estimate GNPA/NNPA to moderate to 2.9%/0.5% by FY24.

RoE to easily surpass the 15% threshold; expect 16.7% by FY24

SBIN reported a RoE of 13.9% in FY22 – the highest since AQR commenced in FY16. From FY17 to FY19, it navigated through the difficult phase of corporate asset quality, which impacted profitability and return ratios. We believe the bulk of the corporate pain is over. It has adequate provisions on this portfolio (93% PCR in Corporate) and appears well-positioned to surpass the long-term trend of 15% RoE in FY23.

Decoding the current drivers of RoE v/s its long-term average

We analyzed the key RoE drivers for SBIN over the last two decades to understand the difference between the previous cycle and the current earnings upcycle. The long-term average RoE (reported) for the bank stands at 15% over FY00-15, after which its financial performance was affected by the asset quality cleanup in the Corporate segment. We are now on the threshold of a phase where we believe it can deliver a RoE above its long-term average of 15%. While the contribution of net interest margin and other income has dropped in the current cycle, the same is largely compensated by lower expenses and provisions. A lower contribution of PBT is offset by the decline in the corporate tax rate to 25%. This leads to a similar RoA of 0.9%. In the current environment, there is potential for margin to expand, led by rising rates. With a 10% higher workforce v/s FY13, the bank manages 2.6x of advances at present as compared to FY13. Thus, employee productivity has improved dramatically and there is further scope for the same as the bank continues to take rapid digital strides (kindly refer Exhibit 25 for details on decomposition of RoE drivers).

Valuation and view

SBIN has delivered a strong performance, amid a challenging macro-environment, led by steady business and revenue growth and controlled provisions. The management expects the momentum to remain healthy as utilization levels improve, while Retail growth is likely to remain steady. A higher mix of floating loans and CASA mix will support margin in a rising interest rate environment. Asset quality performance has been strong, and the outlook remains healthy, with a low restructured book and SMA pool. We estimate credit cost to be controlled at 1% in FY24, enabling 28% earnings CAGR over FY22-24. We expect SBIN to deliver a RoA/RoE of 0.9%/16.7% in FY24. SBIN remains our top Buy in the sector, with a TP of INR600 (1.2x FY24E ABV + INR195 from its subsidiaries).

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