State Bank of India - 3QFY17 Result Update - Operating Performance Improves; Maintain BUY - Reliance Securities

State Bank of India (SBI) has delivered an improved performance in 3QFY17 with its operating profit growing by 30.7% YoY (+11.8% QoQ) to Rs125.4bn. While fresh slippages declined to Rs103.6bn from Rs118.5bn in 2QFY17 and Rs206.9bn in 3QFY16, PCR rose to 62.9% from 62.1% in 2QFY17 and 60.7% in 4QFY16. Operating profit growth was aided by 56.4% YoY (+14.7% QoQ) rise in other income to Rs96.7bn and 8.4% YoY (+2.2% QoQ) growth in NII to Rs147.5bn. One-time gain of Rs17.6bn from 3.9% stake sale in life insurance arm and higher treasury profit of Rs39.7bn due to monetization of part of excess SLR holdings led to strong growth in other income. However, its PAT grew by 2.8% QoQ to Rs26.1bn as loan loss provision rose by 12.5% YoY (+13.2% QoQ) to Rs89.4bn in 3QFY17. Loan book grew by 4.1% YoY (+1% QoQ and -1.1% YTD) due to higher repayment of loan in demonetized currencies and unwinding of FCNR deposit related loan book. We reiterate our BUY recommendation on the stock with an SOTP-based Target Price of Rs326.

Management Commentary

- About 80% of fresh slippages came from Watch List accounts. Post considering slippages and upgrades in 3QFY17, Watch List account now stands at Rs180bn (-30% QoQ). SBI revoked SDR/S4A on Rs164bn of loans across 25 borrowers.

- Management expects loan growth of ~6% in FY17E and ~11% in FY18E.

- The Bank maintains slippage guidance of Rs400bn for FY17E out of which Rs290bn has already been reported in 9MFY17.

- NIMs will further decline by 5-6bps due to cut in MCLR. Currently, ~40% of Bank's loan is linked to MCLR and the rest is linked to Base Rate.

- CASA ratio improved to 46.6% in 3QFY17 from 42.7% in 2QFY17. Management expects ~50% of incremental CASA deposits to remain with the Bank.

Outlook & Valuation

SBI has been able to deliver relatively better operating performance compared to its peers despite elevated stress in balance sheet. We believe that the Bank has been able to clean-up its loan book effectively, which reasonably assures us that it will continue to surprise positively on operating and asset quality fronts from FY18E onwards. Further, we believe that demonetization drive will also have positive impact on SBI's performance. We reiterate our BUY recommendation on the stock with an SOTP-based Target Price of Rs326 (valuing parent at 1.5x FY18 Adj. BV implying standalone value at of Rs275 and valuing subsidiaries at Rs51 after 15% holding company discount).

Shares of STATE BANK OF INDIA was last trading in BSE at Rs.276.25 as compared to the previous close of Rs. 275.85. The total number of shares traded during the day was 5531109 in over 32297 trades.

The stock hit an intraday high of Rs. 282.45 and intraday low of 275. The net turnover during the day was Rs. 1545990382.

Source : Equity Bulls

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