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SBI remains asset quality champion and top pick

Result Highlights

* Asset quality: Gross slippages amounted to Rs 25.79 bn (annualized slippage ratio of 0.4%) and recoveries and upgrades were also healthy at Rs 23.06bn

* Margin picture: Whole bank NIM at 3.15% was down/up -9bps/3bps QoQ/YoY, declining sequentially due to lower interest on income tax refund

* Asset growth: Whole bank advances grew 5.3%/8.5% QoQ/YoY driven sequentially by domestic retail and SME loans and, also, international loans

* Opex control: Total opex de-grew/grew -2.2%/0.5% QoQ/YoY, employee cost degrew -0.8%/-4.9% QoQ/YoY and other cost de-grew/grew -4.2%/9.9% QoQ/YoY

* Fee income: Core fee income rose 6.6%/7.4% QoQ/YoY, driven sequentially by commission on government business and cross selling

Our view – SBI remains asset quality champion, Re-iterate as a top pick

Even adjusting for the idiosyncrasy in SBI’s gross slippage disclosure, the annualized slippage ratio for SBI is highly commendable: Healthy recovery and upgrades imply a net NPA addition of just Rs 2.73bn in 3QFY22. The bank continued to add standard asset provisions, taking total non-PCR provisions to Rs 300.89bn or 113 bps of advances. Total restructured book, including MSME restructuring, stood at about Rs 400bn or about 150 bps of advances, with no unusual behaviour observed so far on this book.

Sequential growth for SBI has improved significantly as other partsof the loan book have started to support growth along with the retail book: Retail book growth remained healthy at 5.3% QoQ, driven by personal loans, which grew 9.1% QoQ. There seemed to be more headroom for growth in personal loans as the 18mn corporate salary customer base has, as yet, been penetrated ~25%. SME loans, for their part, grew 9.8% QoQ. Corporate loans returned to growth, growing 3.5% QoQ, with management once again flagging large unutilised working capital limits worth about Rs 2 trn.

NIM outlook seems positive given floating rate book, SA rate strategy and structural loan mix evolution: 49% of loan book is linked to MCLR and 22% is externally benchmarked, partly to treasury bill yield, which could help NIM in an up-trending rate environment. SBI does not plan to hike SA rates. Higher-yielding segments of loan book such as unsecured retail and SME loans can continue to rise as a share of loan book.

We maintain ‘Buy’ rating on SBI with a revised price target of Rs 686: We value the bank at 1.3x FY23 P/BV for an FY22E/23E/24E RoE profile of 13.0/13.5/15.0%. We assign a value of Rs 200 per share to the subsidiaries, on SOTP. We had flagged SBI as our top pick in our sector initiation report dated 30th Jun 2021.

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