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Strong growth, but treasury loss leads to earnings miss

System-beating credit growth led by overseas book growth, but hurts margins: Overall credit growth accelerated to 16% yoy/3% qoq, albeit on a low base. This was mainly led by strong traction in overseas book, as seen in some other PSBs as well, which could possibly be due to opportunity on loan syndication, trade financing, and INR depreciation. Retail growth remains healthy at 19% yoy/3% qoq, led by continued strong traction in Xpress credit (up 32% yoy) and back-end support by mortgages. Deposit growth was relatively subdued at 9% yoy, but recent RBI’s statement asking banks to fund credit via mobilizing deposits instead of sourcing funds from the RBI could push banks to raise rates to mobilize deposits. However, NIM slipped 10bps qoq to 3% mainly due to growth in low-margin overseas book and some impact of lower interest on IT refund, but it should recover, led by better LDR and re-pricing of assets

Pace of NPA deceleration moderates: Gross slippages in 1Q were seasonally higher at Rs101bn/1.6% of loans, including SME, thereby taking-off the pace of sharp deceleration in NPAs for three quarters to 3.9%. Of these slippages, the bank has already recovered nearly Rs28bn of NPAs. Add to that, transfer of NPAs to NARCL should begin soon, while the steady lumpy corporate resolutions outside NARCL in FY23 should accelerate moderation in NPA ratios. The restructuring pool under RBI RE 1.0/2.0 was at Rs290bn/1% of loans. Overall specific PCR remains healthy at 75%, which coupled with drawdown on contingent provision (as done in 1Q) should keep LLP <1% in FY23, thereby supporting profitability.

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 (1x FY24E ABV). That said, the bank will have to shore-up capital buffers by tapping capital market/unwinding value in subsidiaries. We retain Buy/OW in EAP with a TP of Rs640, valuing the core bank at 1.3x June 24E ABV 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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