State Bank of India - Commendable feat; already on a journey to the new normal - ICICI Securities

State Bank of India's (SBI) Q3FY21 performance beat our expectations with: 1) stress being contained much below the guided range; 2) growth looking up; and 3) stability in key operating metrics. The performance further bolsters our confidence in increasing earnings estimates and reaffirming our positive stance. Noteworthy positives are: i) 9MFY21 proforma slippages (annualised) + restructuring is at 2.1% of advances; ii) credit cost has been contained at 1.8% (despite accelerated provisioning on proforma slippages and restructuring); iii) improved traction in retail credit (15% YoY growth) - that too directed towards a better-rated customer profile; and iv) NIMs sustaining at 3.34% (after rebounding 40bps since March). Better visibility on sustaining the operating profit (>1.5% of assets) with new normal credit cost trajectory will drive RoE upwards of 14% by FY23E and valuations above 1x book. We therefore revise target price to Rs474 (assigning 1x FY23E adjusted book, earlier Rs361) and maintain BUY on the stock with more than 35% upside (our top pick in the space).

- Asset quality metrics commendable; 9MFY21 slippages contained at 1.3%: Reported slippages (with SC dispensation benefit) were at Rs63.9bn in H1FY21 and Rs2.37bn in Q3FY21 (from overseas accounts). In addition, proforma slippages were Rs164bn in 9MFY21. Net increase in proforma slippages was Rs20.73bn after adjusting for upgrades of Rs60bn-70bn from the proforma reported in H1FY21. All put together, slippage run-rate was much lower at 1.3% in 9MFY21 vs its recent past average. Proforma GNPLs, with recoveries and write-offs, were down from 5.88% to 5.44%.

- SMA-2 pool settles at sub-50bps; further pull-back expected: SMA-2 pool has risen from Rs34bn to Rs125bn; of this, Rs24.9bn is included in restructuring and Rs23.5bn in proforma slippages for 9MFY21. So ex-restructuring, ex-proforma, SMA-2 pool would be Rs77bn (35bps). SMA-1 stands at Rs54bn at 23bps (compared to Rs88bn in Q2FY21). The bank highlighted it should be able to pull-back a significant portion from SMA-2. Key risk would be higher flow through from SMA-2 pool into NPLs going forward.

- As guided, restructuring capped below <1%: Based on a granular portfolio analysis and post bottom-up assessment, the bank has guided for restructuring to cumulatively settle at <1%. True to its guidance, restructuring applications received were at Rs181bn (0.8% of advances); of this, corporate segment was at Rs117bn, retail at Rs38bn and SME at Rs25.5bn. Till date, Rs45bn of restructuring has already been done. SME restructuring in Q4FY21 too would be minimal.

- Recoveries, provisioning buffer to cushion credit cost: Recoveries in current circumstances are better at Rs56bn in Q3FY21 and resolutions in few chunky corporate accounts would help sustain the momentum. With adequate provision coverage at 68% (corporate stress pool coverage at 89%), Covid provisions at Rs60bn, provision of Rs53bn on proforma slippages and Rs14.6bn provisioning on restructured pool, SBI expects a lower burden on credit cost going forward. However, conservatively, we are building-in slippages at 1.6%/1.5%/1.2% and credit cost at 1.9%/1.4%/1.2% for FY21E/FY22E/FY23E.

- Retail credit growth looking up: Disbursements have gained robust momentum across products - home loans witnessed 23% YoY growth in disbursements in December and personal loans at 77%. Retail credit grew 15% YoY/6% QoQ with home loans growing at 10%, gold loans being up 4x YoY, and Xpress credit growing at 36% YoY. 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.

Corporate portfolio was flat YoY as well as QoQ due to run-down of exposure in iron & steel, petroleum, tourism/hotels etc. SME credit, even with adjusted for ECLGS disbursements, expanded 6% QoQ suggesting emerging opportunities in this segment. Under ECLGS scheme, It sanctioned Rs260bn (Rs250bn in Q2FY21) and disbursed Rs230bn (compared to Rs220bn in Q2FY21). We are building in credit growth of 8%/12%/17% for FY21/FY22/FY23.

- NIMs sustain at 3.34%: Excluding one-time interest income in Q3FY20, NII grew more than 20% YoY (up 2% QoQ). Despite MCLR cut of 75bps post-March (to 7%), LDR ratio fell to 67% in 9MFY21, it sustained NIM trajectory at 3.34%. Moreso, it benefitted from incremental higher growth in retail credit, 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.

- Wage revision provisioning continues; opex contained despite rise in activity levels: As the management highlighted, the bank made further provision of Rs26.5bn towards wage revision leading to employee cost increase of ~15% YoY (4% QoQ). Despite recovery in activity levels, operating expenses growth was contained at 2% QoQ (up 11% YoY). With this, 'cost to assets' was still contained at sub-2%.

- Capital efficiency was visible with RWA/assets managed at 50% and CET-1 settling at 10.3%. 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 shores up capital adequacy. 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.

- YONO building scale thereby accelerating digital agenda: YONO has added 4.2mn registrations in Q3FY21 taking cumulative registrations to 32.8mn. 41% of retail asset accounts and 60% of liability customers were sourced through digital channels in Q3FY21. In 9MFY21, 1.07mn of pre-approved personal loans amounting to Rs160bn were disbursed (Rs53bn in Q3FY21).

Shares of STATE BANK OF INDIA was last trading in BSE at Rs.393.05 as compared to the previous close of Rs. 355.1. The total number of shares traded during the day was 10611010 in over 97876 trades.

The stock hit an intraday high of Rs. 408.35 and intraday low of 385.2. The net turnover during the day was Rs. 4226621612.

Source : Equity Bulls

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