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Chronic under-valuation will not last

* Subsidiaries augment the value of the overall consolidated entity like no other bank: Non-lending businesses contribute about 20% to the overall value of SBI, whereas, for other key banks, at 0-5%, such businesses do not move the needle in terms of augmenting overall shareholder value. If lending subsidiaries, particularly SBI Cards, are included, the contribution of subsidiaries to overall shareholder value for SBI rises to about 30%.

* The end of the corporate NPL cycle and a low risk retail book is translating into industry low slippage ratio: The annualised slippage ratio of 0.66% for SBI in 2QFY22 was the lowest among largecap banks (albeit this was net of upgrades from 1QFY22 slippages but also contained, in a sense, a one-off as Srei exposures comprised 65% of declared slippage) and bears testimony to a now benign corporate NPL cycle in conjunction with what is relatively limited damage to the low-risk retail book. The retail book is low-risk since >40% comprises home loans and while ~15% comprises personal loans, there are very low risk loans given out to internal salary account customers. Restructuring, including pipeline, is relatively under control at just ~120 bps of advances.

* SBI has embarked on an expansion into higher-yielding loan segments, which will aid margin expansion: In SBI, we see an ability to increase, prospectively, the share of higher-yielding loans in a risk-calibrated manner including in areas such as personal loans (Xpress credit) and credit cards (housed within SBI Cards). SBI has also moved into areas such as gold loans and microfinance. SBI also sits on a low loan-to-deposit ratio of 64%, which it stands to expand, incrementally aiding net interest margin.

* While large base is a challenge, we think SBI is poised to deliver a double digit growth CAGR of close to 10%, which is sufficient for its investment thesis to fructify: Importantly, a relative revival is expected for wholesale lending due to a variety of factors. Capacity utilisation is at 60% only and is expected to improve. There are unavailed term loans and unutilized working capital limits worth Rs 4.5 trn, which will come into play. There is also a proposal pipeline worth Rs 1.15 trn. In terms of recent trends, there has been a pickup in the first month of the third quarter. As one gets into the busy season, the bank is seeing improved inquiries and better utilisation. As far as retail lending is concerned, superior cost of deposits, market presence and brand recall is translating into reasonably healthy growth, which is tracking 3.7% on sequential basis.

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