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Result and Price Analysis

State Bank of India (SBIN) has delivered a strong show on Asset Quality front. It’s reported GNPA (2.55% v/s 2.76% in 1QFY24) and NNPA (0.64% v/s 0.71% in 1QFY24) holds steady with stable PCR (incl. AUCA) of 92%. Furthermore SMA1/2 (7bps v/s 18bps) decreased sequentially. The bank has witnessed better than expected advance growth (12.4% YoY & 3.1% QoQ) led by growth across segment and steady deposit base (12% YoY & 3.5% QoQ) sequentially with better liquidity position. Nevertheless, the PPOP declined because of higher operating cost (C/I: 61.4% v/s 50.4%). The net profit declined by 8% YOY and 15.1% QOQ on the back of marginally higher NII (Domestic NIMs: 3.43%) and lower loan provision (credit cost: 22bps). The 2QFY24 calculated ROA and ROE stood at 1.01% and 16% respectively; surpassing the ROE target of 15%. The bank has established total standard asset and contingent provision of ~?337bn (101bps of net advances) as on 2QFY24. With ample contingent buffer (against ECL provisions) and strong growth outlook, we believe the annual ROE target of 15% is achievable in FY24E/25E. Therefore, we recommend BUY with target price of ?697.

Gazing the core

Asset Quality improvement continues; meaningfully lower slippages: The bank’s slippages were suggestively lower sequentially at ?38bn (v/s ?77bn) and recoveries (?40bn v/s ?36bn) were higher. Moreover, bulky write-offs (?44.2bn) led to improvement in GNPA ratio at 2.55% v/s 2.76% in the previous quarter. The bank’s asset quality improved sequentially as reported GNPA/NNPA/PCR ratio stood at 2.55%/0.64%/92% against 2.76%/0.71%/92% in 3QFY23. GNPA ratio of retail, agriculture, SME and corporate segment stood at 2.88%, 10.66%, 4.4%, and 3.1% respectively. Additionally, The Bank’s SMA 1 (?21.8bn, 7bps) and SMA 2 (?18bn, 5bps) have narrowed. Moreover, BB & below book up to 10% of wholesale book. The restructured pool came down to ?208bn (62bps of net advances) from ?227bn (70bps) in the previous quarter. Management expects the pool to stay stable in near term. On total restructuring, retail book accounted for ~62%. Retail restructuring was almost home loan and SME category and there was hardly any restructuring under Xpress credit card. The provision towards restructuring (?78bn) stood around 30% of the restructured book which is quite similar to large private banks. The provisioning expenses of ?1.15bn (Credit cost: 0.22% v/s 0.32% in 1QFY24) was down because of provision write backs and carries ?18.15bn for loan loss provisions. Standard asset provisions write-back worth ?7.2bn reported in 2QFY24. The bank has established total provision outside PCR of ~?337bn (101bps of net advances) as on 2QFY24. In the previous quarter, the Chairman mentioned that the bank has done some back of the envelope calculation on ECL provisioning and believes that the additional provision requirement could be much lower than the o/s non-specific provisions

Profitability dragged because of higher operating expenses: Domestic NIMs (3.43%) down by 4bps sequentially and the CD ratio is lower at 71.3%. Overall, the bank doesn’t see much risk to the current margin levels in the coming quarters. YOA and COD stood at 8.9% and 4.65% against 8.8% and 4.55% in the previous quarter. Overall NIMs down marginally to 3.31%. It translated in 1.5% sequential growth in NII (395bn). Non – interest income declined by 10.6% sequentially. However, operating expenses ratio remain higher sequentially (C/I: 61.4% v/s 50.4% in 2QFY24) resulted in the PPOP de-growth of 23.2% sequentially. Higher operating expenses has partial one off component. Provision expenses were sequentially lower (95.4% down QoQ) because of standard asset provision and contingent provision write-back. However, Loan loss provision (~?18.1bn v/s ~?26.5bn in 1QFY24) were lower too. Hence the net profit witnessed a decline of 8% YoY and 15.1% sequentially. The bank’s ROA/ROE (calculated, annualized) stood at 1.01% and 15.96% respectively; surpassing the ROE target of 15%. ROA decline was majorly due to higher operating expense (one-off) and expected to stabilize at 1.2% in future.

Sound credit growth; ~14% growth expected in FY24E: The bank’s net advances stood at ~?34.1tn; grew healthy by 12.4% YOY and 3.1% QOQ. Retail (36.5% contribution) and Agriculture (8% contribution) grew by 3.25% and 3.72% sequentially. Corporate (28.7% contribution) flat QoQ. The management guided FY24E credit growth of ~14%. Furthermore, the bank has a corporate loan book pipeline of ?4.7tn and expects this book to grow in low double digit. Moreover, the bank’s investments are ~17tn of which ?10.9tn are HTM and ?5.9tn are AFS with modified duration of 1.9. Around 31% loan are fixed rate loans. 22% of loan book is linked to EBLR, 46% MCLR, and 0.24% are repo linked. In 2QFY24, the bank’s CRAR stood at 14.28% vs. 14.56% in the previous quarter with CET 1 of 9.94%. The RWA to assets stood at 49.3% with LCR (~146%) well above the regulatory requirement.

Outlook & Valuations

Under base case scenario, we expect the bank to post a ROA/ROE of 1%/15.5% by FY24E led by healthy balance sheet growth along with higher PCR and stable asset quality. We recommend a BUY with target price of ?697 (potential upside of 21%). We value the standalone bank with PBV of 1.2xFY25E Adj. BVPS of ?459 and value of subsidiaries per share of ?146.

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