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Flagged as the top pick last year, SBI continues to live new paradigm

Result Highlights

* Asset quality: Gross NPA additions amounted to Rs 24.41 bn (annualized NPA addition ratio of 0.33%) and recoveries and upgrades were healthy at Rs 52.07bn

* Margin picture: Whole bank NIM at 3.17% was up/down 15bps/-7bps QoQ/YoY, lower YoY as interest on income tax refund was Rs 5.92 bn Vs Rs 19.0bn YoY

* Asset growth: Whole bank advances grew 4.6%/19.9% QoQ/YoY driven sequentially by Corporate and International advances

* Opex control: Total opex grew 10.5%/7.6% QoQ/YoY, employee cost grew 6.8%/2.3% QoQ/YoY and other operating cost grew 15.7%/15.3% QoQ/YoY

* Fee income: Core fee income de-grew/grew -6.7%/10.2% QoQ/YoY, lower sequentially, largely due to lower miscellaneous fee income.

Our view – Flagged as the top pick last year, SBI continues to live new paradigm

Management stated that 14-16% growth is possible for the financial year: While the retail engine has been growing all this while, the corporate segment has also seen a decent trend, driven by working capital utilisation rising 400 bps YoY. Corporate term loan sanctions and proposals present a decent pipeline worth Rs 3.7 trn. Furthermore, corporates are finding international borrowing cost expensive, including hedging cost, and are hence, turning to domestic bank lending.

Margin would remain protected as a substantial quantum of loan book re-pricing seems to lie ahead: MCLR is mostly 6-month and hence, will take time to reprice. Further, a substantial amount of the EBLR book is t-bill-linked i.e. to the 91-days t-bill and hence, has a 3-month reset and will also take time to reprice. Also, the bank would be mindful, from a margin perspective, while raising deposit rates. Management stated that they would like to keep NIM at current levels but might do better.

Credit quality outcomes have been particularly benign, underlining the paradigm SBI has been in for a while: Credit cost for the quarter, considering only loan loss provisions, was 28 bps, down 15 bps YoY. The segmental breakup of slippages was: SME –Rs 4.08bn, Agri – Rs 6.31bn, Core retail – Rs 3.3bn, Corporate – Rs 9.56bn and IBG – Rs 0.74bn.

We maintain ‘Buy’ rating on SBI with a revised price target of Rs 760: We had placed SBI as the top pick in our Sector Initiation Report dated June 2021. We value the bank at 1.3x FY24 P/BV for an FY23E/24E/25E RoE profile of 13.3/15.2/16.0%. We assign a value of Rs 205 per share to the subsidiaries, on SOTP.

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