Buy State Bank of India Ltd For Target Rs.925 by Motilal Oswal Financial Services Ltd
Asset quality robust; lower provisions drive earnings
Margin contracts 13bp QoQ
* State Bank of India (SBIN) reported 3QFY25 PAT of INR168.9b (up 84% YoY, 4% beat) as lower provisions offset lower other income.
* NII grew 4% YoY to INR414.5b (2% miss). NIMs moderated 13bp QoQ to 3.01%. Provisions declined 80% QoQ to INR9.1b mainly due to the reversal of standard provisioning of INR4.9b and restructured provisioning reversal of ~INR9.0b.
* Loan book grew 13.8% YoY/3.8% QoQ, while deposits grew 10% YoY/2% QoQ. CASA ratio moderated 83bp QoQ to 39.2%.
* Fresh slippages declined to INR38.2b (INR48.7b in 2QFY25). GNPA ratio improved by 6bp QoQ to 2.07%, while net NPA ratio held flat at 0.53%. PCR ratio declined marginally to 74.7%. SMA2 as on Dec’24 included a longterm government sector customer of the bank, with fund-based outstanding of INR58b. The account has been pulled back subsequently. Excluding this, SMA 1 &2 remained under control at 9bp of loans.
* We cut our earnings estimate by 1.7%/3.4% for FY26/FY27 and expect FY27E RoA/RoE of 1.05%/16.8%. We reiterate BUY with a TP of INR925 (1.2x FY27E ABV).
Loan growth guidance intact at 14-16%; NIMs to remain above 3%
* SBIN reported 3QFY25 PAT of INR168.9b (up 84% YoY, 4% beat), as lower provisions offset weakness in revenue/PPoP. For 9MFY25, earnings grew 29% YoY to INR522b. In 4QFY25, we expect PAT of INR189b (down 8.5% YoY).
* NII grew 4% YoY to INR414.5b (2% miss). NIMs moderated 13bp QoQ to 3.01%.
* Other income declined 4% YoY to INR110b (16% miss) as treasury gains declined to INR11.9b (vs. INR46.4b in 2QFY25). Forex income also declined to INR480m (vs. INR11b in 2QFY25), affected by MTM losses.
* Opex declined 6% YoY to INR289.4b (in line) resulting in 16% YoY growth in PPoP to INR235.5b. C/I ratio increased 662bp QoQ to 55.1%.
* Advances grew 13.8% YoY/3.8% QoQ. Of which, Retail grew 11.7% YoY, Corporate rose 15% YoY, and Agri/SME increased by 15.3%/18.7% YoY. Within Retail, Xpress credit saw a modest growth of 1% QoQ (up 2.8% YoY).
* Deposits grew 10% YoY/2% QoQ, with CASA ratio moderating 83bp QoQ to 39.2%. Domestic CD ratio increased 107bp QoQ to 68.9%.
* Fresh slippages declined to INR38.2b (INR48.7b in 2QFY25). GNPA ratio improved by 6bp QoQ to 2.07%, while net NPA ratio was flat at 0.53%. PCR ratio declined marginally to 74.7%. Restructured book declined to INR137b (0.34% of advances). SMA2 as on Dec’24 included a long-term government sector customer of the bank, with fund-based outstanding of INR58b. The account has been pulled back subsequently. Excluding this, SMA 1 &2 remained under control at 9bp of loans. SBIN continues to expect FY25 credit cost at 0.5%.
* CET-1 stood at 9.52% (10.99% including profits for 9MFY25). Despite steady growth, the bank continues to accrete capital, driven by strong internal accruals.
* Subsidiaries: SBICARD clocked a PAT of INR3.8b (down 30% YoY). SBILIFE’s PAT grew 71% YoY to INR5.5b. PAT of the AMC business was flat YoY at INR5.4b, while SBI General reported a profit of INR900m (up 20% YoY).
Highlights from the management commentary
* Credit growth guidance remains at 14-16%, with broad-based growth across all segments.
* Repo-linked loans constitute 28% of the portfolio, and a 25bp rate cut is unlikely to have a significant impact on NIMs.
* Yields on advances have remained stable over the past year, but deposit costs have risen. NIMs were impacted by higher deposit costs.
* Forex income was impacted by MTM losses due to USD/INR appreciation. Despite adverse dollar movements, the bank managed to recoup some losses through rate corrections.
Valuation and view
SBIN reported a mixed quarter as the provisioning reversal boosted earnings, while margins moderated 13bp QoQ. Other income too reported a miss, affected by weak treasury/forex performance. The bank now expects NIMs to remain above 3%, supported by levers such as CD ratio and MCLR repricing (20bp utilized, 35bp cushion in MCLR pricing). Credit growth was healthy, while the unsecured book (Xpress Credit) saw modest growth. Deposit growth was modest, while CASA growth remained under pressure. SBIN has guided for overall deposit growth of 10% YoY. The bank has seen an increase in its domestic CD ratio to ~68.9%. Fresh slippages and credit costs were contained, which underscores improvements in underwriting standards. Restructured book was well under control at 0.34% of advances and the SMA pool was high due to one long-term government sector customer of the bank, with fund-based outstanding of INR58b.The account has been pulled back subsequently. Excluding this, SMA1&2 remained under control at 9bp of loans. We cut our earnings estimates by 1.7%/3.4% for FY26/FY27 and expect FY27 RoA/RoE of 1.05%/16.8%. We reiterate BUY with a TP of INR925 (1.2x FY27E ABV).
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