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Higher write – offs led to GNPA reduction; Highest ever quarterly profit

Result and Price Analysis

State Bank of India (SBIN) has delivered a strong result on operating and assets quality front. Reported gross slippages stood at Rs.24bn v/s Rs.97bn in the previous quarter. It’s reported GNPA (3.52% v/s 3.91% in 1QFY23) and NNPA (0.8% v/s 1.0% in 1QFY23) holds steady with stable PCR (incl. AUCA) of 92%. Furthermore SMA2 (7bps v/s 6bps) increased marginally. The bank has witnessed better than expected advance growth (21% YoY & 5% QoQ) led by growth across segments and steady deposit base (10.6% YoY & 3.4% QoQ) sequentially with better liquidity position. Moreover the bank has reported highest ever quarterly PAT of Rs.132bn (v/s Rs.62bn in 1QFY23) on the back of healthy NII (Domestic NIMs: 3.55%) and lower provision (credit cost: 28bps). The 2QFY23 calculated ROA and ROE stood at 1.04% and 17.4% respectively; surpassing the ROE target of 15%. The bank has established total standard asset and contingent provision of ~Rs.298bn (101bps of net advances) as on 2QFY23. With improving operating environment, ample contingent buffer and strong growth outlook, we believe the annual ROE target of 15% is achievable in FY23-24E. Therefore, we recommend BUY with target price of Rs.663.

Gazing the core

Higher write-offs led to GNPA reduction: The bank’s slippages were suggestively higher sequentially at Rs.31bn (v/s Rs.24bn) and lower recoveries (Rs.16.4bn v/s Rs.52bn). Moreover, bulky write-offs (Rs.100bn and Rs.37bn respectively) led to decrease in GNPA ratio to 3.14% v/s 3.52% in the previous quarter. The bank’s asset quality improved meaningfully as reported GNPA/NNPA/PCR ratio stood at 3.14%/0.77%/92% against 3.52%/0.8%/92% in 2QFY23. GNPA ratio of retail, agriculture, SME and corporate segment stood at 3.2%, 12.0%, 5.2%, and 4.3% respectively. Additionally, The Bank’s SMA 1 (Rs.31bn, 10bps) and SMA 2 (Rs.17bn, 6bps) narrowed down. Moreover, BB & below book flat 11% of wholesale book. The restructured pool came down to Rs.260bn (85bps of net advances) from Rs.273bn (93bps) in the previous quarter.

Management expects the pool to stay stable in near term. On total restructuring, retail book accounted for ~56%. Retail restructuring was in home loan and SME category and there was hardly any restructuring under Xpress credit card. The provision towards restructuring (Rs.78bn) stood around 30% of the restructured book which is quite similar to large private banks. The provisioning expenses of Rs.57.6bn (Credit cost: 0.21% v/s 0.28% in 2QFY23) was in line with expectations and carries Rs.15.8bn for loan loss provisions. Standard asset provisions worth Rs.42.3bn reported in 3QFY23 against Rs.13bn has written back in the 1QFY23. The bank has established total provision outside PCR of ~Rs.338bn (111bps of net advances) as on 3QFY23.

Highest ever quarterly profit; surpassing ROE target: Domestic NIMs (3.49%) up by 10bps sequentially. Management believes the NIMs to remain stable. YOA and COD stood at 7.87% and 3.9% against 7.66% and 3.84% in the previous quarter. Overall NIMs stood at 3.29%. It translated in 8.2% sequential growth in NII (381bn). Strong NII growth and lower opex. (C/I: 49% v/s 52% in 2QFY23) resulted in the PPOP growth of 19.4% sequentially. Provision expenses were sequentially higher (90% QoQ) because of higher standard asset provision built up. However, Loan loss provision (~Rs.15.8bn v/s ~Rs.20bn in 2QFY23) were lower. Hence the net profit witnessed steady jump of 7.1% sequentially. The bank’s ROA/ROE (calculated, annualized) stood at 1.1% and 17.7% respectively; surpassing the ROE target of 15%.

Superior credit growth: The bank’s net advances stood at Rs.30.6tn; grew healthy by 18.6% YOY and 3.6% QOQ. Retail (42.5% contribution) and Agriculture (9.3% contribution) grew by 4.6% and 3.5% sequentially. Corporate (35% contribution) grew by 4.9% QoQ. Corporate credit witnessed a lower sequential growth due to higher base. The bank’s investments are ~15.7tn of which Rs.9.6tn are HTM and Rs.6.0tn are AFS with modified duration of 1.9. Around 22% of loan book is linked to EBLR, 49% MCLR, 17% fixed rate and 0.24% are repo linked. The bank’s deposit stood at Rs.42.1tn grew steadily by 9.5% YOY and 0.6% QoQ. CASA ratio flat at 44.5%. In 3QFY23, the bank’s CRAR stood at 13.27% vs. 13.51% in the previous quarter with CET 1 of 9.26%. The bank doesn’t expect capital raise from the Govt. or market in near term. The RWA to assets stood at 50.6%.

Outlook & Valuations Under base case scenario, we expect the bank to post a ROA/ROE of 1%/16.4% by FY24E led by healthy balance sheet growth along with higher PCR and stable asset quality. We recommend BUY with target price of Rs.663 (potential upside of 22%). We value the standalone bank with PBV of 1.3xFY24E Adj. BVPS of Rs.398 and value of subsidiaries per share of Rs.146.

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