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‘MTM hit weighs on profitability’.

Quarterly performance of the State Bank of India (SBIN) was unalluring as the margin and profit were declined. While the assets quality trend was largely remained stable due to contained net slippages. Loan growth, though, picked up led by strong expansion of retail & foreign books. Profit declined by (6.7)% YoY of Rs61 bn (below our estimate of Rs79 bn) due to the higher MTM losses. While the treasury loss was expected given the increase in yield, reporting MTM losses of Rs65 bn was elevated leading to (80.4)% YoY decline in other income of Rs23 bn in Q1FY23. Though, the management expects this (MTM loss) is unlikely to continue given the inflation in India has likely peaked. Growth of domestic advances picked up to 13.7% YoY (10.3% YoY in Q4FY22) due to 18.6% YoY expansion in retail credit.

Margin declines on lower yield:

NII growth remained stable at 12.9% YoY but eased compared to 15.3% YoY in the previous quarter. Sequentially, NII growth remained flat. NIM declined by (13) bps QoQ to 3.02%. YoA declined by 15bps QoQ to 7.43% compared to 3 bps QoQ decline in CoD. As per the management, NIM movement may remain in line with the past trend, but it expects that assets re-pricing will reflect on yield from July onwards. Meanwhile, core operating profit growth remained strong at 33.7% YoY on fee income growth (17.9% YoY) and contained OPEX (1.4% YoY). Provisioning declined by (56)% YoY to Rs44 bn providing support to bottom line, nevertheless elevated MTM losses restrained profitability.

Net slippages remain contained on strong R&U:

Gross slippage was Rs101 bn (v/s our estimate of Rs87 bn) with quarterly slippages rate rising to 0.37% as compared to 0.11% in the previous quarter. 58% of the fresh slippages came from SME and agri book. Net slippage was Rs49 bn due to the R&U of Rs52 bn during the quarter. GNPA reduced by 6bps QoQ to 3.91% and coverage ratio stood at comfortable level of 75%

Stress book declines:

Restructuring book (RAB) reduced to Rs288bn or 1.0% of loans in Q1FY23 (from 1.1% in Q4FY22) in which retail constituted 53% and SME at 41%, while the share of corporate book reduced to 7% from 10% in the previous quarter indicating resilient bulky loan book. Standard provisions stood at Rs293 bn or 1.0% of loans which seem adequate buffer given the declining stress in the book. Credit cost (annu.) reduced to 0.6% in Q1FY23 compared to 1.0% in FY22. We have reduced our provisioning estimates given the lower stress and strong R&U trend.

View and Valuation:

Loan growth is likely to remain strong broadly across the segments over the expected fiscals. While NIM remains in the lower trajectory, we believe likely strong growth in high yielding retail assets and re-pricing of assets can provide boost to margin. Credit cost is expected to remain contained given the lower stress, likely strong trend of R&U and high provisioning buffer. As per our estimates, RoE is expected to increase from 11.9% in FY22 to 14.7% by FY24E.

We re-iterate our BUY rating on stock with a revised target price of Rs640 per share. Core banking business is valued at 1.3xFY24E P/Adjusted Book Value arriving at Rs478 per share and its subsidiaries are valued at Rs162 per share.

Key risks for investments include 1) Higher slippages risk from SME book 2) Elevated Cost-to-income ratio and 3) Lower trajectory of NIM.

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