Buy State Bank of India Ltd For Target Rs.654 - Yes Securities
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Slippages decline to particularly benign levels, Reiterate as key top pick
Result Highlights
* Asset quality: Gross slippages amounted to Rs 41.76 (annualized slippage ratio of 0.66%) and recoveries and upgrades were also healthy at Rs 74.07bn
* Margin picture: Whole bank NIM at 3.24% was up 32 bps/12 bps QoQ/YoY, due to lower interest reversals and higher interest on IT refund, sequentially
* Asset growth: Whole bank advances grew 0.3%/6.2% QoQ/YoY driven sequentially by domestic retail and agri loans and, also, international loans
* Opex control: Total opex rose 4.1%/5.2% QoQ/YoY, employee expenses rose 0.3%/0.1% QoQ/YoY and other expenses rose 10.2%/13.7% QoQ/YoY
* Fee income: Fee income rose -0.2%/2.8% QoQ/YoY, which was generally slower than peers from the private sector space
Our view – Slippages decline to particularly benign levels, Reiterate as key top pick
Most of the slippages emerged from the corporate book, with Rs 27bn due a single Kolkata-based group (Srei): Srei exposure has been fully provided for. Restructuring 1.0 and 2.0 totaled Rs 303.12bn as of 2QFY22 or 124 bps of advances. Incremental Restructuring 2.0 amounted to Rs 120.71bn during the quarter. Provisions for the quarter plummeted 98.1% QoQ to Rs 1.88bn due to factors including recovery from DHFL account and utilization of Covid provisions, the latter declining by Rs 28.84bn.
Management stated that it would aim to maintain NIM between 3.2-3.3%: The interest on income tax refund amounted to Rs 19.22bn during 2QFY22 compared to a small number for 1QFY22. SBI continues to sit on a low loan-to-deposit ratio, which declined 122 bps QoQ to 64.1%.
Management stated that it is possible for the bank to grow at 10%: Management alluded to the potential in corporate loans as there are unavailed term loans and unutilized working capital limits worth Rs 4.5 trn and also a proposal pipeline worth Rs 1.15 trn. There has been a pickup in corporate lending the first month of the current quarter.
We maintain ‘Buy’ rating on SBI with a revised price target of Rs 654: We value the bank at 1.2x FY23 P/BV for an FY22E/23E/24E RoE profile of 11.9/13.3/14.7%. We assign a value of Rs 219 per share to the subsidiaries, on SOTP. We had flagged SBI as one our top 3 picks in our sector initiation report dated 30th Jun 2021.
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