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Healthy credit demand, however, margin continue to fall

Flat top-line growth due to increase in interest costs: SBI Net Interest Income (NII) for Q3FY24 remained flat growing marginally by 0.8% QoQ/4.6% YoY to Rs 39,816 Cr. The flattish NII was mainly due to sharp increase in interest expended which increased by 8.1% QoQ/37.8% YoY to Rs 66,918 Cr despite interest income grew at a healthy rate of 5.3% QoQ/23.2% YoY. Pre-provisions operating profit (PPOP) declined by 19.4% YoY mainly due to employee expenses.

Decline in profitability due to one-offs: PAT during quarter declined by 36.1% QoQ/35.5% YoY mainly due to the exceptional item reported by the company worth Rs 7,100 Cr. The company provided for the welfare of the employees by increasing pension and addressing anomaly worth Rs 5,400 Cr along with dearness liability utilization of Rs 1,700 Cr. However, the management indicated that such provisioning is a one-off item and expects FY25E profit growth to remain stable.

Broad based advances growth: Advances during the quarter increased by 5.1% QoQ/14.4% YoY mainly in line with the industry. The growth in advances was broad as the bank saw growth from segment such as retail personal (4.3% QoQ/15.3% YoY), Agri (6.5% QoQ/18.1% YoY) and SME (7.5% QoQ/19.2% YoY). However, corporate segment remained sluggish with a growth of 4.7% QoQ/10.7% YoY. However, the bank remains positive on the growth of corporate loans going ahead as it has loans worth Rs 4.6 Lakhs Cr in the pipeline. Overall, the management remains positive of the credit growth going forward and expect growth in the range of 14-15% and expects SBI to growth in similar range.

Term led deposits growth: Deposits increased in line with the industry by 1.6% QoQ/13% YoY to Rs 47.6 Lakhs Cr. The growth in the deposits was mainly led by term deposits which increased by 2.6% QoQ/19.5% YoY. CASA deposits growth remained muted with growth of 4.5% YoY. Due to this, CASA ratio declined by 70bps QoQ/330bps YoY to 41.2%. The bank credit to deposits ratio inched upwards to 252bps QoQ/90bps YoY to 75.3% which remains healthy as compared to peers. Going ahead, the management expects industry deposits to grow at 12-13% YoY and SBI to grow in similar line.

Decline in margins: Domestic NIMs during the quarter declined by 2bps QoQ/28bps YoY to 3.4%. The decline in margins was mainly due to the increase of deposits 10bps QoQ/85bps YoY. However, the management specified that the repricing of deposits has been done and expects margin to decline marginally by 2-3bps in coming quarters.

Valuation and outlook: We remain positive on SBI on the back of its healthy credit growth in-line with the industry. The bank is expected to increase its profits going forward driven by healthy asset quality, stabilizing margins and growing efficiency. We expect NII/PPOP/PAT to grow at a CAGR of 20.3%/16.8%/20.1% over FY23-26E. We maintain Buy on SBI and revise our target price upwards to Rs 755 valuing the bank at 1.3x of its FY26E Adj. BV

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