State Bank of India - Rising visibility on sustenance of operating profit - ICICI Securities

State Bank of India's (SBI) Q2FY21 matched our expectations with operating metrics suggesting performance sustainability in the near term. This gives us confidence to revise earning upwards and reaffirm our positive stance by virtue of: 1) collection efficiency (ex-agri) excluding arrears settling at 97% for Q2FY21 (97.5% for October); 2) estimated slippages + restructuring at 2.5% of advances, despite slippages (including standstill accounts settling higher at 2.9% - agri segment continued to disappoint); 3) improved traction in retail credit (15% YoY growth), that too directed towards better rated customer profile or secured assets; 4) NIMs further expanded 10bps to 3.34% (after rebounding 30bps in Q1FY21). Credit cost was contained at 1.9% (despite accelerated provisioning on proforma slippages and restructuring). Need for contingency buffer was again not felt though we conservatively estimate credit cost at 2.1%/1.5% for FY21E/FY22E. Improving visibility on sustenance of operating profit (>1.5% of assets), unlocking potential in subsidiaries and tempting valuations, more than outweigh near-term risks on equity dilution and negative surprise (if any) in credit costs. Maintain BUY with a target price of Rs272.

- Collection efficiency (ex-agri) settles at 97%: SBI reported collection efficiency (ex-agri) for Q2FY21 at 97% (that too not including arrears, which we think is commendable). This suggests SMA-0/1/2 at 3%, which further has improved by 50bps in October.

- Slippages run rate at <2% for FY21E; not much burden on credit cost: Slippages (including standstill accounts) came in higher at Rs171bn (2.9% run rate) primarily flowing from SME (Rs50.8bn) and agri (Rs90bn). Positively, Rs59.6bn (including Rs11bn of agri and Rs30bn of SME) has already been upgraded in October. SBI estimates fresh slippages of Rs200bn for H1FY21 - thereby working out to a run rate of <2% for FY21. Recoveries in current circumstances are expected to be at a similar level of Rs60bn-70bn for H2FY21 (over and above few chunky corporate accounts). With adequate provision coverage at 71% (including accelerated provisioning on corporate stress pool at 88%), Covid provisions at Rs30bn, provision of Rs32bn on proforma slippages and Rs6.5bn provisioning on restructured pool, SBI expects a lower burden on credit for H1FY21. However, conservatively, we are building-in slippages at 3.7%/2.9% and credit cost at 2.1%/1.5% for FY21E/FY22E.

- Restructuring estimated at <1% of advances: Currently, 48k retail accounts have approached for restructuring a total of Rs24bn, while in corporate segment SBI has received restructuring requests on Rs40bn. Based on its assessment, it expects another Rs130bn of restructuring requests in the coming months, thereby cumulatively settling at <1% -- a positive surprise. It has done granular analysis of the portfolio taking ground-level feedback from relationship managers and the estimates it has put forth are post bottoms-up assessment, hence more realistic.

- Retail credit growth back to pre-Covid levels: Disbursements and sanctions in retail credit were significantly higher YoY for Sept 20 as well as for Q2FY21 across products: home loans witnessed 12% YoY growth in disbursements, auto loans 27% YoY, personal loans 61% (gold loans grew more than 4x YoY, and Xpress credit 32% YoY / 10% QoQ). Credit profile in the retail segment too is comforting - 94% of Xpress credit customers are government/defence employees whose salary levels have not been hit due to the pandemic. Also, in the home loan segment, 50% of customers are government employees, 20% are from well-rated corporates and 30% are self-employed customers with high creditworthiness.

- NIMs gain further traction to 3.34%: SBI has cut MCLR by 75bps post-March (to 7%) and LDR ratio fell to 66.1% in H1FY21. Yet, it reported a further 10bps NIM expansion - moreso benefitting from incremental higher growth in retail credit (corporate book actually shrunk QoQ), lower NPL drag (interest on proforma slippages not reversed) and sharp cut in deposit rates. Going forward, deployment of surplus liquidity and resolutions may offset any downward pressure on NIMs.

- Cost rise follows pick-up in activity: As the management has highlighted in Q1FY21 earnings call, the bank made further provision of Rs22bn towards wage revision; however, overall employee cost increase was capped at ~11% YoY (6% QoQ). With recovery in activity levels, operating expenses rose 24% from Q1FY21 levels (up 8% YoY). With this, 'cost to assets' was still contained at sub-2%.

- Capital efficiency was visible with RWA/assets further contracting to 50% and profit accrual leading to 35bps rise in CET-1 to 10.49%. While we believe, equity raising is imminent in the medium term, the management said capital is sufficient to manage near-term growth as plough-back of profits further shore up capital adequacy. It raised Rs199bn in tier-2 (Rs160bn) and AT1 (Rs40bn) capital at the best-in-class rates during the quarter. By FY21-end, tier-2 capital is expected to reduce to ~2% (from 2.8% currently) on account of redemption and exercise of call options.

Shares of STATE BANK OF INDIA was last trading in BSE at Rs.207.05 as compared to the previous close of Rs. 204.75. The total number of shares traded during the day was 5225212 in over 32956 trades.

The stock hit an intraday high of Rs. 209 and intraday low of 198.1. The net turnover during the day was Rs. 1067599464.

Source : Equity Bulls

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