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Asset quality showing remarkable strength; earnings momentum gaining pace

* SBIN reported a steady quarter, with net earnings growing 67% YoY to INR76.3b (15% beat), aided by controlled provisions, as asset quality showed remarkable strength, despite the impact of the second COVID wave. It created a family pension provision of INR74.2b, instead of amortizing it over five years, thus prudently deploying one-off gains from the DHFL recovery and tax refund. The bank has fully provided for its exposure towards the SREI group.

* GNPA/NNPA ratios improved by 42bp/25bp QoQ to 4.9%/1.5% as fresh slippage subsided to INR41.8b (66bp annualized). Restructured book remained in check at 1.2% of loans, while the SMA pool declined sharply to INR66.9b (27bp of loans).

* We expect SBIN to deliver FY23E/FY24E RoE of 14.5%/15.7%, even as we build in a credit cost of 1.1%/1%. We maintain our Buy rating, with a revised TP of INR675 (1.4x Sep’23E ABV + INR210 from subsidiaries).

Earnings juggernaut in motion; asset quality ratios improve sharply

* SBIN reported a 2QFY22 PAT of INR76.3b (up 67% YoY; 15% beat to MOSLe), led by strong NII and controlled provisions.

* NII grew 11% YoY boosted by a tax refund of INR19.92b. Domestic NIM improved by 35bp QoQ to 3.5%.

* Other income fell 4% YoY, affected by a sharp decline in treasury gains to INR4.29b. Core fee grew at a modest 3% YoY. OPEX grew by 5% YoY (in line) and C/I ratio stood at 54.1% (v/s 51.9% in 1QFY22). The bank created a family pension provision of INR74.2b, instead of amortizing it over five years like most PSU Banks. PPOP grew by 10% YoY (in line).

* Advances/deposits grew 7%/10% YoY (flat/2% QoQ). Advances growth was led by a 15% YoY growth in Retail advances, while Corporate advances declined by 4%, impacted by lower utilization rates. Xpress Credit/Home loans grew 31%/10.7% YoY. The overseas portfolio grew at a healthy 16% YoY. CASA mix stood at 46.2% (stable QoQ).

* GNPA/NNPA ratios improved by 42bp/25bp QoQ to 4.9%/1.5% as fresh slippages stood at INR41.8b v/s INR156.6b in 1QFY22. SBIN used INR28.8b of contingent provisions and has an outstanding buffer of INR61.8b. Restructured loans stood at INR303b, or 1.2% of total loans (0.8% in 1QFY22), while PCR improved by 219bp QoQ to 70%. SMA pool stood at INR66.9b v/s INR113b in 1QFY22

* Subsidiary performance: SBICARD reported a PAT of INR3.45b (67% YoY). SBILIFE saw its shareholder PAT decline 18% YoY to INR2.47b on higher COVID-19 claims. SBI MF reported a 31% YoY PAT growth at INR2.59b.

Highlights from the management commentary

* The management expects NII to remain strong and NIM at 3.2-3.3%.

* It aims to deliver a RoE of 15% on a sustainable basis across cycles. The management believes it to be on track and is confident of achieving the same.

* Around INR80b, which slipped during 1QFY22, was recovered in 2QFY22

Valuation and view

SBIN has reported a robust performance as it bravely fought off the COVID-19 impact and displayed remarkable resilience in asset quality performance. The bank has been reporting continued traction in earnings, led by controlled provisions. However, business trends remain modest, impacted by continued deleveraging by corporates. The bank has been able to maintain a strong control on restructured assets at 1.2% of loans, while the SMA pool has declined sharply. We expect the slippage trajectory to moderate further (assuming there is no third COVID wave), while credit cost may undershoot the normal cyclical trends, though we are conservatively keeping credit cost at 1-1.1%. The bank has a healthy PCR of 70% and holds unutilized COVID-related provisions of ~INR62b. We maintain our estimates for FY23E/FY24E and project a RoA/RoE of 0.9%/15.7% for FY24E. SBI remains our conviction Buy in the sector. We are revising our TP to INR675 (1.4x Sep’23E ABV + INR210 from subsidiaries).

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