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Another strong quarter; well positioned to sustain the growth momentum

Asset quality ratios at multi decadal best; SMA book declines to 12bp

* SBIN reported a steady quarter as net profit at INR143.3b beat our estimate, aided by lower provisions even as bank made higher provisioning towards wage revisions.

* NII grew 12.3% YoY/1.5% QoQ (3% beat), while domestic NIMs declined 4bp QoQ to 3.43%. Total revenues grew 14% YoY.

* Slippages declined to INR41b after a seasonal bump in 1Q, along with healthy recoveries/write-offs. As a result, GNPA/NNPA ratios declined to 2.55%/0.64%. RSA pool declined to INR209b (60bp of advances).

* We broadly maintain our estimates as higher wage provisioning gets offset by controlled credit costs. We estimate FY25E RoA/RoE of 1.1%/18.3%. Reiterate BUY rating with an unchanged TP of INR700 (based on 1.1x FY25E ABV + INR202 from subs).

Revenue growth steady; Asset quality improves further

* SBIN reported 8% YoY growth in net profit to INR143.3b (up 8% YoY/ down 15% QoQ) as lower provisions partly offset higher opex. NII grew 12.3% YoY (3% beat) even as margins declined 4bp QoQ to 3.43%. SBIN has guided for a further 3-5bp compression in margins over 2HFY24.

* Other income grew 22% YoY, supported by healthy treasury gains of INR20.2b. Core other income, however, rose only 4% YoY.

* SBIN increased the wage provisioning run rate for a potential hike of 14% (from 10%), effective Nov’22. This resulted in an incremental wage provisioning cost of ~INR34b in 2Q. Consequently, PPoP declined 8% YoY to INR194b, while Core PPoP declined 16% YoY.

* Advances grew ~12% YoY/3.3% QoQ, led by 16% YoY growth in retail and 23% YoY growth in the SME segment. Agri book grew 15% YoY, while corporate growth was slower at 6.6% YoY. Among retail, Xpress credit/VF grew 18%/20% YoY. Home loans, which form 54% of the retail book and 20% of the overall book, grew 13% YoY/3% QoQ. Deposits increased by 12% YoY/3.5% QoQ, while the CASA mix declined 100bp QoQ to 41.9%.

* Slippages declined to INR41b after higher slippages in 1Q due to seasonality. A decline in slippages and higher recoveries/write-offs led to a 21bp QoQ drop in GNPA ratio to 2.55% and a 7bp QoQ reduction in NNPA ratio to 0.64%. Restructured book declined to INR209b (0.6% of advances), while SMA 1/2 portfolio decreased to INR39.6b (12bp of loans).

* Subsidiaries reported mixed performance: SBICARD clocked a PAT of INR6.03b (up 15% YoY). SBILIFE’s PAT grew 1% YoY to INR3.8b. PAT of the AMC business increased by 25% YoY to INR4.7b, while SBI General reported a loss of INR110m vs. a loss of INR230m in 2QFY23.

Highlights from the management commentary

* Domestic margins may contract further by 3-5bp due to a rise in deposit costs. In the loan book, the MCLR impact has already been captured in the margin compression.

* Wage provisioning has been increased to 14% from 10% earlier. SBIN provided INR34b in 2Q to cover the provisioning shortfall effective Nov’22.

* On the proposal flow, the bank has a proposal pipeline of INR3.4t and INR1.4tn pending for disbursements, totaling INR4.8tn. Accordingly, the bank expects 14% growth.

Valuation and view

SBIN delivered a steady quarter, with a beat on profitability aided by lower provisions and steady revenue growth. Opex was high due to high wage provisions, effective Nov’22, hurting PPoP growth. Margins declined 4bp QoQ and the management expects a further 3-5bp compression, though the bank has levers in place (CD ratio, MCLR repricing) to maintain stable margins. Business growth was healthy, with most business segments showing traction (barring corporate portfolio). Asset quality remained robust as net NPA ratio improved further and the restructured book remained in control at 0.6%, along with lower SMA pool at 12bp of loans. We estimate SBIN to deliver FY25E RoA/RoE of 1.1%/18.3%. We reiterate our BUY rating with an unchanged TP of INR700 (1.1x FY25E ABV + INR202 from subs).

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