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Mixed Quarter; Outlook promising

State Bank of India is India’s largest bank. The bank operates 22,224 branches globally and has a vast network of 63,906 ATMs/CDMs. It provides a wide range of financial services, such as insurance, credit cards and asset management, through its subsidiaries.

* Advances grew by 8.9% YoY supported by 14.6% YoY growth in retail advances; Deposits surged by 8.8% YoY

* Interest Income improved 4.4% on YoY basis and 0.3% sequentially, thereby leading to improved margins. NIM increased 3bps sequentially to 3.11%

* The quarterly results look promising and the improvement in business parameters signals a turnaround in the long-run. Hence, we reiterate our BUY rating on the stock, with a rolled forward target price of Rs. 651 using the SOTP methodology.

NIM margins remain relatively stable

In Q3FY22, Net interest income grew by 6.5% YoY to Rs. 30,687cr (-1.6% QoQ) despite reduction in yield on advances, down 59bps YoY to 7.57%, aided by the decrease in cost of deposits i.e. down 43bps YoY to 3.83%. As a result, Net interest margin (NIM) improved 2bps YoY to 3.11%, mainly driven by Domestic NIM (+4bps YoY) partially offset by foreign NIM (-7bps YoY). Non-Interest income dipped by 6.2% YoY, while it grew by 5.7% on QoQ basis. Pre-Provisioning Profit grew 6.9%. YoY to Rs. 18,522cr, as a result of elevated costs as total expenses increased 2.0% YoY to 59,830cr and 0.4% sequentially. The company reported a surge in PAT to Rs. 8,432cr (+62.3% YoY, 10.6% QoQ) due to lower provisioning of Rs. 6,794cr (down by 32.6% YoY). PCR also rose to 88.32% vs 87.68% in Q2FY22 and 90.21% in Q3FY21.

Asset Quality Improves on QoQ basis

GNPA for the quarter dipped to 4.5% (vs. Q3FY21: 4.77% and Q2FY22: 4.9%), while NNPA stood at 1.34% (vs. Q3FY21: 1.23% and Q2FY22: 1.52%). Slippages improved on QoQ basis to 1.16% against 1.56%, however steep as against 0.36% in Q3FY21. High slippages remains a concern for the bank in the near future. Strong growth in CASA deposits continued to drive loan growth as domestic CASA grew by 10.0% YoY with CASA ratio at 45.74% (+59bps YoY). Retail loans grew 14.6% YoY and 5.3% QoQ, led by Xpress Credit (+28.9% YoY, 9.1% QoQ), home loan (+11.2% YoY, 3.8% QoQ). CAR dipped to 13.23% vs 14.50% in Q3FY21 and 13.35% in Q2FY22.

Key call highlights

* Return on Assets (ROA) increased to 0.64% vs 0.45% in Q3FY21

* Average daily login by customers reduced to 1.03cr from 1.2cr QoQ on YONO app whereas YONO has acquired 4.54cr customers and created significant value for the bank

Outlook & Valuation

Overall business growth remains better than the industry average, advances from retail segment grew at 14.6% YoY and foreign advances jumped 21.4% YoY. We see that the growth is expected to accelerate by SBI Bank’s people, product, distribution, and technology backed by strong asset quality. Hence we reiterate our BUY rating on the stock, with a revised target price of Rs. 651 using the SOTP methodology.

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