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Flagged as the top pick in June 2021, SBI’s investment thesis remains broadly intact

Our view – Project finance draft no bugbear and capital ratio no constraint

Asset quality – SBI assuaged concerns regarding the RBI draft circular on project finance, while underlying asset quality outcomes remained sound: SBI clarified that it has project loans worth Rs 1.21 trn, while there is a 3-year timeline to make provisions as per the Draft. They further added that any provisioning arising out of the Project Finance Draft is much lesser than the annual outlay arising out of ECL. Separately, they noted that the impact from IndAS / ECL would amount to Rs 60bn per year. For the quarter, Gross NPA additions had amounted to Rs 39.84bn, translating to an annualised gross slippage ratio was 0.4%., while recoveries and upgrades amounted to Rs 20.52bn.

Net interest margin – Management’s guidance for stable NIM sounded largely believable: Whole bank NIM at 3.30% was up/down 8bps/-30bps QoQ/YoY, sequentially higher due to higher yield on advances and interest on income tax refund. The interest on income tax refund amounted to about Rs 13bn compared with Rs 7bn odd in 3Q. The bank’s cost of deposits had plateaued in December and NIM should not undergo any significant change. The bank endeavor would be to maintain NIM at the current level.

Balance sheet growth – While capital ratios remain lower than peers, management reiterates headroom for growth: The guidance for the bank’s credit growth in FY25 is 13- 15%. The CET1 ratio stands 10.36% and management continues to foresee CET1 accretion on internal accruals. The bank remains open to the option of raising equity capital if the growth trend so warrants. As per the bank’s estimation, it can grow Rs 7trn without raising capital, which translates to 21% growth. For the quarter, whole bank advances grew 5.1%/15.2% QoQ/YoY driven sequentially by Corporate, Retail and Agri. loans. We maintain ‘Buy’ rating on SBI with a revised price target of Rs 1000: We value the bank at 1.3x FY26 P/BV for an FY25E/26E RoE profile of 16.4/16.4%. We assign a value of Rs 255 per share to the subs., on SOTP. (See our sector report dated June 2021).

Other Highlights (See “Our View” above for elaboration and insight)

* Opex control: Total cost to income ratio was at 51.3% down by -904/-341bps QoQ/YoY and the Cost to assets was at 2.0% down by -10/-20bps QoQ/YoY.

* Fee income: Core fee income to average assets was at 0.6%, up 15bps QoQ but down -2bps YoY

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