State Bank of India - Valuations tempting; risks incrementally subsiding - ICICI Securities

Valuations at 0.4x FY20 adjusted book for inarguably the leading and superior franchise, State Bank of India (SBI) should not be overlooked - especially when some of the associated risks are subsiding. As anticipated, risks were mounting high on its valuations and it underperformed Bank NIFTY by 10-20% in past three to six months. However, at this juncture, some of the concerns are subsiding: 1) industry-wide improvement in collection efficiency will play out for SBI too; 2) recent equity raising in associated banks caps the cost that SBI has to shell out; 3) Notable transition towards superior asset profile with secular progress in retail (home) loans and recalibrated focus on quality corporates. Improving visibility on sustenance of operating profit (1.7-2.0% of assets), unlocking potential in subsidiaries, and tempting valuations, compel us to upgrade the stock to BUY with a revised target price of Rs255 (earlier Rs212) assigning a multiple of 0.7x P/ABV FY22E. These structural benefits outweigh near-term risks on equity dilution, NIM pressure and credit cost.

- Does valuation at 0.4x FY20 ABV more than adequately capture perceived risks?
Here, we have tried to quantify the maximum impact of perceived risks on SBI's net worth: 1) Deteriorating macro amidst pandemic will have a rub-off effect on its asset quality and resolution pipeline (SBI is proxy to the Indian economy). However, even in the worst case (table no:2), the risks knock off maximum one-third of its net worth (assuming zero resolutions). 2) SBI will be in the forefront of cutting MCLR (75bps since March) leading to depressed NIMs for a couple of years (as witnessed in Q4FY20), which would impact net worth by ~10%. 3) Lower fee income and wage revision / higher retirement benefit cost can hit net worth by 5-7%. 4) Imminent dilution risk given CET-1 at 9.7% - shoring it up by ~150bps will have a book value dilution impact of ~5-10%. These, to our judgement, are the elements that street seems to be discounting currently.

- What street seems to be overlooking?
Consensus seems to be overlooking SBI's relatively lower vulnerability on asset portfolio (assessed by our SAAP framework) as the bank has notably transitioned towards better-profile assets. Operating profit at >1.5% of assets can accrete the book by >20% each year. Group companies have significantly outperformed, implying more discount to SBI's banking business. Value unlocking in subsidiaries or other investments (NSE, UTI AMC) can help it mobilise Rs200bn-250bn (100-120bps lever to CET-1).

- Long-term structural improvement outweighs near term risks?
One should not overlook SBI's efforts to recalibrate focus on quality corporates (flat growth, 39% towards PSUs/government entities, 77% towards ‘A' & above rated, <5% exposure to Covid-impacted industries), secular progress in retail (>16% 5-year CAGR in home loans -constituting 20% of advances) and noteworthy progress in digital adoption (>21mn registered YONO users, 2.6x on liability account, 2.8x on lending side). This will make our worst case assumptions slightly out of reach and can surprise positively. However, we don't deny that contingency buffer in Q1FY21 could be higher (as SBI did not created any in Q4FY20 given higher coverage of 84% and lack of visibility). Also, wage revision and retirement benefit obligation can lead to one-time costs in FY21. NIM profile can be impacted by aggressive cut in MCLR.

- Moratorium by May-end was comforting; further improvement expected

By May end, 82% of its customers had paid 2 or more instalments. In retail 21% customer availed moratorium (20% for home loan, 5% for unsecured lending). In corporate book, ~13% of customers (7-8% by value) have availed moratorium. In SMEs, 47% have opted for moratorium. Private banks in Q1FY21 have witnessed improvement in collection efficiency (vindicated by their moratorium disclosure). The same will be reflected for SBI as well. However, we believe the decline will not be as significant as SBI had some benefit already reflected as it disclosed May-end numbers (compared to April end for others). Also while SBI will also extend moratorium in phase-2 post review, it might not be as stringent as private banks.

Shares of STATE BANK OF INDIA was last trading in BSE at Rs.187.15 as compared to the previous close of Rs. 191.9. The total number of shares traded during the day was 2330295 in over 15438 trades.

The stock hit an intraday high of Rs. 193.35 and intraday low of 186.6. The net turnover during the day was Rs. 438787764.

Source : Equity Bulls

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