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Sustained delivery on profitable growth; valuations undemanding

* SBI continued to report a strong PAT of Rs91bn (est.: Rs86bn), up 41% yoy, led by better credit growth/margins, forex fees and contained LLP. However, the bank took a hit on investments (Rs20.6bn) mainly on security receipts, while core banking fees were slightly lower. It expects fee growth to improve in FY23, led by business pick-up and lower fee waivers, while contained opex will partly cushion the impact of rising G-sec yields on the treasury.

* SBI delivered system-beating credit growth at 11% yoy in FY22, mainly led by strong traction in retail (mortgages/xpress credit), SME and corporate/overseas growth. It expects credit growth momentum to continue in FY23, with retail doing the heavy-lifting and supported by SME/corporate growth. It believes that better LDR and a higher share of the floating-rate loan portfolio (MCLR - 41%, Repo - 23%, T-Bill - 11%) should support its strong margin trajectory.

* SBI’s GNPA/NNPA ratios have been steadily falling since FY18, hitting a low of 4%/1.3% in Q4 due to lower net slippages. The restructured pool was lower at 1.4% of loans. Lower NPA formation and healthy PCR on stock of NPAs should contain incremental LLP. Factoring in better growth, margins and LLP, we expect the bank to report a decadal-high RoE of ~15-17% over FY23-25E, without factoring in any equity dilution.

* SBI has come a long way and is now far better placed in terms of delivering sustained profitable growth, but it still trades at cheap valuations. It is reasonably capitalized and can shore up capital buffers by tapping capital market/unwinding value in subsidiaries. Retain Buy/OW in EAP with a revised TP of Rs640 v/s Rs680, valuing the core bank now at 1.3x v/s 1.5x FY24E ABV due to higher CoE and subs/investments at Rs207. SBI remains one of our preferred large-cap stocks after ICICI.

System-beating credit growth; surpasses expectations: Overall credit growth improved to 11% yoy/6% qoq, led by continued strong traction in retail (up 15% yoy) and resurging corporate book. Retail growth was mainly driven by mortgages (up 12% yoy) and Xpress credit (up 28% yoy). SBI expects credit growth momentum to continue in FY23, with retail doing heavy lifting and supported by SME/corporate growth. The corporate sanctioned pipeline remained strong, while utilization limits too remained low. Overseas corporate growth is partly influenced by the bank’s newly launched factoring business. Reported NIM remained strong at 3.1%, while it believes that better LDR and higher share of floating rate loan portfolio (MCLR - 41%, Repo - 23%, T-Bill - 11%) should support its strong margin trajectory.

Steady improvement in asset quality, higher PCR to contain incremental LLP: Net slippages, including Future Retail (100% provided), were low at Rs36bn/0.6% of loans, while higher recoveries led to a sharp 50bps qoq reduction in the GNPA ratio to 4%. The restructuring pool under RBI RE 1.0/2.0 was at Rs310bn/1.1% of loans, including restructuring under older schemes at 1.4% of loans. The moratorium has ended largely in the housing book and the repayment track record seems to be healthy, thereby reducing the risk of higher flow of delinquency from the restructured pool. After a long delay, the transfer of NPAs to NARCL should begin soon, while the steady lumpy corporate resolutions outside NARCL in FY23 should accelerate moderation in NPA ratios. SBI expects LLP to be <1% in FY23.

Outlook and valuation: SBI remains one of our preferred picks, given its healthy growth trajectory and improving RoA/RoRWA/RoE profile. SBI has come a long way and is now far better placed in terms of delivering sustained profitable growth, but it still trades at cheap valuations. SBI is reasonably capitalized and can shore up capital buffers by tapping capital market/unwinding value in subsidiaries. Retain Buy/OW in EAP with a revised TP of Rs640 v/s Rs680, valuing the core bank now at 1.3x v/s 1.5x FY24E ABV due to higher CoE and subs/investments at Rs207. Key risks: Macro-slowdown hurting corporate credit acceleration, delay in corporate resolutions, and a sharp rise in G-sec yields hurting treasury performance.

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