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Best-in-class 2Q, with focus on sustaining performance ahead

* Post the treasury hit leading to a profit miss, SBI made a strong come back in 2Q, reporting its highest-ever quarterly PAT at Rs132bn (Emkay est.: Rs95bn) on the back of robust credit growth, sharp margin uptick and lower LLP. Bank guides for sustained healthy growth/margin and reduction in NPAs, which should drive its RoA to ~1% in the mid-term.

* Bank clocked higher-than-industry credit growth at 20% YoY/5% QoQ, led by strong traction in retail/corporate growth. Bank believes that the impact of rate hikes on credit demand is not prominent enough yet and, thus, expects growth to remain healthy in the near-to-medium term. This, coupled with continued asset re-pricing, should help the bank sustain margins at around current levels, with an upward bias.

* Bank has seen steady improvement in asset quality, with NNPA now below 1%, given its aggressive provisioning stance; the restructured pool too moderated, to 0.9% of loans. Bank claims that it has not been intimated by the RBI on any standard provision shortfall towards stressed PSU entities, while it remains well covered and hence expects any impact to be manageable.

* Factoring-in better growth/margins and lower LLP, partly offset by higher staff cost due to ad hoc provisions towards wage revision, we raise our earnings for FY23-25E by 10-14% and expect the bank to report decadal-high RoE of 15-18% without equity dilution. We retain BUY on the stock, with revised TP of Rs715 (earlier Rs640), based on 1.4x (earlier 1.3x) Sep-24E standalone ABV and subsidiary valuation of Rs206.

* What we liked: Strong growth/margin uptick, lower slippages leading to NNPA dipping below 1%. What we did not like: Slower CASA growth driving a fall in CASA ratio to 43% and higher overseas credit growth.

* Strong credit growth & asset re-pricing leads to margin jump, post the Q1 dip: Overall credit growth accelerated to 20% YoY/5% QoQ, mainly on higher retail/corporate growth. The overseas book continued to see growth, as seen in most PSBs; this is due to a better lending opportunity for Indian corporates. Retail growth remains healthy at 19% YoY/4% QoQ, led by continued strong traction in Xpress credit (up 30% YoY) and the vehicle/mortgage book. Bank has increased its credit growth guidance to ~16% in FY23, as it gains confidence amid buoyant credit demand, not only in the retail segment but also from Corporate. NIM sharply improved by 30bps QoQ to 3.3% in Q2, due to better LDR and asset re-pricing, which the bank expects to sustain, given continued repricing benefit.

* Lower NPA formation, higher PCR drive-down NNPA to <1%: Gross slippages in Q2 sharply reduced post a seasonally-weak Q1, standing at Rs24bn/0.4% of loans and thereby pulling down the GNPA ratio to 3.5%. This, coupled with further improvement in specific PCR to 78%, led to NNPA dipping <1% to as low as 0.8%. Transfer of NPAs to NARCL should finally begin in Q3, as the bank has identified nearly 40 accounts that have exposure of Rs34bn; the lumpy corporate resolutions outside NARCL in FY23 should also drive down NPA ratios. The restructuring pool under RBI RE 1.0/2.0, too, remains low, at Rs270bn/0.9% of loans, and should meaningfully come off next year, as bulk of the portfolio comes out of moratorium.

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