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Robust growth momentum; Outlook Positive

State Bank of India (SBI) is India’s largest bank, with 22,405 branches globally and 65,627 ATMs/cash deposit machines. It also provides insurance, credit card and asset management services via its subsidiaries

• In Q2FY24, net interest income (NII) grew 12.3% YoY to Rs. 39,500cr on higher yields. Net interest margin (NIM) improved to 3.3% (+14bps).

• Pre-provision operating profit (PPOP) declined 8.1% YoY on account of revision in wage expenses. PAT, however, increased 8.0% YoY owing to significant reduction in provisions (-96.2% YoY) during the quarter.

• SBI reported robust growth momentum in Q2FY24. Higher yields along with healthy loan book are expected to drive operational growth in future and support balance sheet. Reducing slippages and GNPA/ NNPA levels will further strengthen asset quality of the bank. Hence, with an optimistic outlook, we retain our BUY rating on the stock, with a revised target price of Rs. 721 based on SOTP methodology.

Higher yields offset elevated funding cost

In Q2FY24, SBI’s gross interest income grew 26.9% YoY, on the back of 34.8% growth in corporate banking and 29.7% in retail banking. NII increased 12.3% YoY to reach Rs. 39,500cr on account of robust 120bps YoY expansion in yields and continuous credit offtake. Cost of deposits went up 81bps YoY due to rise in interest rates and repricing of deposits. Interest expenses thereby rose 38.5% YoY to Rs. 61,879cr. Overall NIM expanded 14bps to 3.3%, however was marginally down by 2bps on QoQ basis. Staff costs rose 47.1% YoY due to retrospective increase in wage provisioning rate to 14% vs 10% earlier, effective from November 2022. PAT however recorded an 8.0% growth at Rs. 14,330cr, on account of lower provisions (-96.2% YoY).

Balance sheet remained strong

Loan book grew 13.3% YoY in Q2FY24 owing to 15.7% growth in retail advances and 22.8% growth in SME advances. GNPA ratio improved by 20bps sequentially to 2.6%, with reduction in gross NPAs seen across all verticals. Slippages dipped 24bps QoQ and provision coverage ratio increased to 91.9% (vs 91.4% in Q1FY24). Deposits grew 11.9% YoY with 11.8% growth in domestic deposits. CASA ratio dipped 275bps YoY due to 17.4% YoY growth in term deposits, higher than growth in CASA (+4.9% YoY). CAR ratio remained above the statutory requirement with 66bps YoY growth to 14.3%.

Key concall highlights

• SBI’s management indicated that domestic NIM might be compressed by 3-5bps moving forward, owing to the elevated cost of funds.

• The management guided that CAR would reach 15.32% by FY24 end with +11% Tier 1 Capital ratio through flowing back of profits.

• The bank had proposals pipeline worth Rs. 4.8trn, whereas Rs. 1.4trn proposals are pending for disbursement in the domestic economy.

Valuation

SBI is expected to deliver robust growth in the upcoming period on the back of a healthy loan book supported by digital transformation and 14% growth in proposal pipeline as indicated by management. Domestic NIM might be a concern in the near term, but higher yields are expected to offset the declining effect. Further, the balance sheet remains strong even as NPAs continue to decline. Hence, with an optimistic outlook, we retain our BUY rating on the stock, with a revised target price of Rs. 721 based on SOTP valuation methodology.

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