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Balance sheet strength to drive credit growth

SBI saw a strong quarter again with a beat on all fronts. NII was higher led by better loan growth that also drove higher NIM. Led by robust business volumes, fee income was healthy while opex was controlled QoQ. As a result, PPoP beat estimates by 21%. Credit offtake was again led by home and express loans while corporate growth was weak due to muted capacity utilization. However, WC cycle is picking up as utilization levels have improved over Sep-Dec’21. Asset quality improved QoQ as lower slippages drove the reduction in GNPA while coverage on GNPA and SR also improved. With its inherent balance sheet strength, SBI could see strong loan growth once the capex cycle revives. Hence we raise loan growth estimates over FY22-24E by 3%. We maintain the multiple at 2.0x on core Sep’23 ABV but raise SOTP based TP to Rs750. Reiterate BUY.

Q3FY22 results – Earnings beat led by strong operating performance

NII was ahead at Rs306.8bn (est. Rs296bn) led by both better loan growth and NIM. Driven by slightly higher yields and lower cost of funds, NIM was a beat at 3.0% (est. 2.9%). As last quarter saw interest on IT refund of Rs19.2bn, normalized NIM was stable QoQ. Loan growth was a beat at 8.9% YoY (est. 7.5%) while deposit growth was in-line at ~9.0% YoY. Other income was higher at Rs86.7bn (est. Rs79.4bn) mainly led by better fee income and AUCA recoveries. Opex was lower at Rs208bn (est. Rs222bn) with staff cost and other opex being lower to estimates. PPoP was a beat at Rs185bn (est. Rs153bn). Provisions came to a normalized level of Rs70bn (est. Rs60bn). Net slippages were much lower that led to a QoQ improvement in GNPA/NNPA to 4.5%/1.3% (-39bps/-18bps QoQ). PAT was Rs84.3bn (est. Rs68.0bn) led by higher PPoP.

Retail momentum continues; corporate could improve due to CG focus on infra

Credit offtake was again led mainly by retail (+14.6% YoY) while corporate fell by 4% YoY as industry capacity utilization was muted. However, WC cycle is picking up as unutilised limit in Sep’21 that was 52% declined to 43% in Dec’21. Term loans also saw a slight improvement. Jan’22 saw a strong traction in corporate lending which may sustain. Infra growth till date has been good which was largely led by various State Govt. enterprises. ECLGS O/S is Rs300bn. With the balance sheet much stronger, SBI could see strong loan growth once the capex cycle revives. Hence we raise loan growth estimates for FY22E/23E/24E by 3% each

Stress accretion substantially reducing; restructured pool controlled

Slippages were much lower at Rs25.8bn (est. Rs77.5bn) which led to reduction in GNPA QoQ. Decline in GNPA QoQ was seen across segments of personal, SME and corporate and agri. Balance sheet strength is improving each quarter as 65% of the provisions for Q3FY22 were made to increase cover on GNPA and SR. Hence PCR enhanced QoQ from 70% to 71% and coverage on the SR book (Rs86bn) also increased to 87%. Recovery from the TWO pool for 9MFY22 was Rs56.3bn and the bank is targeting Rs80bn for the full year. The total TWO pool totals to Rs1.8bn of which 20% could be recovered in the near to medium term. OTR pool was stable QoQ 1.55%. Buffer provisions were maintained QoQ at Rs60bn or 23bps of loans

Valuation and Risks

For 23E/24E we raise loan growth est. by 3% each and reduce provisions. This would positively impact PAT by 10%/4% which coupled with lower stress enhances ABV for FY23E/24E by ~5% each. Hence retaining the multiple at 2.0x on core Sep’23 ABV we raise SOTP based TP from Rs730 to Rs750. Reiterate BUY. Risks: lower loan growth and NIM.

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