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Strong all-round performance; growth set to improve

* SBI once again reported a strong PAT of Rs76bn (est. Rs72bn), aided by better margins and lower provisions due to the write-back of DHFL recovery (Rs40bn). Unlike peers, SBI fully provided for family pension liability in Q2 (Rs74bn), utilising the one-off gain. Gross NPA declined 42bps qoq to 4.9%, while restructuring was moderate at 1.2% of loans.

* Credit growth was moderate at 6.5% yoy, dragged by corporate. However, retail growth was healthy at 15% yoy, driven by mortgages/xpress credit and GL. The corporate pipeline was strong at Rs1.5tn, led by Infra/steel/oil industries and green shoots in some industries, which should accelerate growth to 10% by year-end and thus further support NIMs.

* Net slippages were lower at Rs42bn (adjusted for NPA from Q1), leading to lower NPAs. We believe that the transfer of NPAs to NARCL (Rs200bn/0.8% of loans) and potential resolutions via NCLT should meaningfully improve asset quality, thus limiting LLP. We estimate SBI’s RoA/RoE trajectory to improve to 0.9%/15.5% by FY24E, up from 0.5%/9% in FY21, led by healthy margins and lower LLP.

* Retain Buy/OW in EAP, with a TP of Rs680 (29% upside), valuing the core bank now at 1.5x Dec’23E ABV and subs/investments at Rs196 (vs. 1.4x Sep’23E ABV and sub/investments at Rs185 earlier). SBI is our second best pick after ICICI, and we believe that better-than-expected growth/asset quality movement could provide further upsides to earnings/valuations.

Retail growth remains strong, while corporate about to recover: Overall credit growth was moderate at 6.5% yoy/0.5% qoq, as consistently lower utilization levels, deleveraging, disintermediation and big-ticket resolutions hampered corporate growth. However, retail growth was healthy at 15.2% yoy, aided by mortgages (up 11% yoy), xpress credit (up 31% yoy), and gold (up 91% yoy). Strong retail growth, aided by lower CoF/interest reversals, led to a 17bps qoq improvement in NIM to 3.1%. We expect NIM to further improve on the back of better growth/LDR, higher portfolio orientation toward retail and sustained cost advantage. Management expects NIM to improve to 3.2-3.3%.

Lower corporate NPA formation, strong recoveries from retail delinquent pool aid asset quality: Unlike peer banks, net slippages (adjusted for recovery from retail delinquent pool in Q1) for SBI were largely contained at Rs42bn (0.7% of loans) despite recognition of SREI at Rs27bn (100% provided). This, coupled with higher w-offs, led to a 42bps qoq reduction in the GNPA ratio to 4.9%. The restructuring pool inched up to Rs303bn or 1.2% of loans (retail 50%, SME 33%) but was low compared to some private peers (HDFCB/ICICI). SMA 1 & 2 (>Rs50bn a/cs) too declined 20bps qoq to Rs67bn, 0.3% of loans. Specific PCR climbed back to a decent level of 70%, besides which the bank carries a Covid-related contingent buffer of Rs62bn, 0.3% of loans. SBI remains confident about its collection efforts and derives comfort from its existing buffers, thus it expects limited incremental credit costs.

Outlook and valuation:

Among PSBs, we like SBI for its strong liability profile, high retail orientation, reasonable capital position and sharply improving RoA/RoRWA/RoE amid renewed focus on profitability while maintaining market dominance and portfolio quality. Retain Buy/OW in EAP, with a revised TP of Rs680, valuing the core bank at 1.5x Dec’23E ABV and subs/investments at Rs196.

Key risks: macro-slowdown and delays in corporate/retail credit demand; sharp rise in Gsec yields hurting treasury; and delay in corporate resolutions.

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