State Bank of India - Credit quality trajectory bolsters confidence; improved visibility towards new normal - ICICI Securities

The trend in net NPA of 5.7%/3.0%/2.2%/1.5% and credit cost of 3.8%/2.7%/1.9%/1.8% over FY18/19/20/21, bolsters our confidence on State Bank of India's (SBI) credit quality trajectory and demonstrates its resilience during the pandemic. The bank's Q4FY21 performance not only beats our expectations, but is superior to many private banks reaffirming our bullish stance with noteworthy positives: i) FY21 slippages at 1.2% with Q4FY21 slippages at sub-1% and restructuring at 0.7% of advances; ii) credit cost contained at 1.8% (despite some contingency and accelerated provisioning); and iii) improved traction in retail credit (16% YoY growth) - that too, directed towards a better-rated customer profile. NII set in lower due to interest derecognition and 'interest on interest' reversal. Overhead costs too hovered high (up 22% YoY / 34% QoQ), but was offset by fee income and stress recoveries. Superior FY21 performance and improved visibility on operating profit (>1.5% of assets) with new normal credit cost trajectory, will drive RoE to ~15% by FY23E and valuations to 1.3x book. We therefore revise our target price to Rs 544 (earlier: Rs 468) and maintain BUY on the stock. With >35% targeted upside, SBI is our top pick in the space. Key risks: 1) Second wave of covid, if prolonged, can weigh on credit cost; and 2) Lower than expected credit growth.

- FY21 slippages settle at 1.2% despite pandemic - well below the guided range: In addition to proforma slippages of Rs165bn, additional actual slippages of Rs54.7bn in Q4FY21 took cumulative slippages for full year FY21 to Rs285.6bn. This translates into a slippage run-rate of 1.2%, almost 100bps lower than the FY20 slippage ratio of 2.2% and also lower than the 1.3% for 9MFY21. Commendably, despite FY21 being a pandemic year, retail slippage ratio was contained at a mere 0.44% in FY21 vs 0.7% in FY20. Management indicated that 7-89 DPD bucket collection efficiency was sustained at 95-96% even in Apr/May'21.

- Restructuring capped at <75bps - well below initial estimate: Restructuring requests for Rs179bn (0.73% of advances) settled much lower than guidance of <1%. Of this, corporate segment was at Rs117bn, retail at Rs40bn and SME at Rs21bn. On potential restructuring under 2.0, the situation is still evolving and we have to wait and watch how corporate, SME and retail customers are responding. SBI has Board-approved policy and structure in place, but it is difficult to quantify the potential extent at this moment.

- Recoveries and provisioning buffer to cushion credit cost: Recoveries and upgrades of Rs43bn and write-offs of Rs86bn in Q4FY21 offset incremental slippages pulling GNPAs down to 4.98% (5.44% in Q3FY21). Credit cost thereby was contained at <1.75% (Rs103bn) in Q4FY21, thereby exiting FY21 with 1.8%. Resolutions are also underway for a few chunky accounts. This, coupled with specific provision coverage at 71%, covid provisions at Rs63bn, standard assets provisions of Rs140bn and other provisions of Rs49bn (~104bps of advances) suggest adequacy of provisioning. This will lower the burden on credit cost in coming quarters. We are building-in slippages at 1.5%/1.3% and credit cost at 1.4%/1.1% for FY22E/FY23E respectively.

- SMA pool much lower than other PSU banks: SMA-2 pool, compared to Rs125bn in Q3FY21, normalised to Rs68bn in Q4FY21 while SMA-1 pool too now constitutes 19bps of advances vs 23bps QoQ. Of the total SMA-1/2 pool of Rs115bn, Rs28.6bn is already included under restructuring hence SMA (ex-restructured) translates to ~35bps of advances which is much lower compared to other PSU banks.

- Retail gradually increasing footprint in overall portfolio: Retail credit reported robust 16% YoY / 5% QoQ growth compared to overall loanbook growth of 5% YoY / 3% QoQ. Retail momentum was primarily led by home loans growing at 11% YoY (to Rs5trn), gold loans being up 465% YoY (Rs210bn) and Xpress credit growing at 36% YoY (Rs1.93trn). As a result, retail mix has also inched up to 40% in the overall portfolio vs 36% a year ago.

Corporate portfolio, on the contrary, was flat YoY as well as QoQ due to underutilisation of existing limits and run-down of exposure in iron & steel, power, telecom, infrastructure, tourism/hotels, etc. SME credit (after expanding 6% QoQ in Q3FY21 driven by ECLGS disbursements) contracted 5% QoQ, but was up 4% for the year. SBI has disbursed Rs230bn under ECLGS 1.0 and Rs23bn under ECLGS 2.0. Management expects an opportunity to grow the corporate and SME portfolios as economic activity levels pick up. Overall, we are building-in credit growth of 12%/17% for FY22E/FY23E respectively.

- Domestic NIMs corrects due to interest derecognition and reversals: Domestic margins were down 23bps QoQ due to derecognition of interest (on slippages) amounting to Rs21.3bn and Rs8.3bn of 'interest on interest' reversals on loans above Rs20mn. Adjusting for this adverse impact of ~34bps, NIMs would have been higher at ~11bps QoQ. Similarly, though the 6% QoQ decline in NII was below expectations, adjusting for reversals it would have been up 4.2% QoQ. Going forward, with credit growth prospects brighter, expansion in C/D ratio (from its cyclical lows), deployment of surplus liquidity, and resolutions may provide support to NIMs.

- 'Opex to assets' ratio at elevated levels due to spike in overhead costs: With impact of wage revisions and retirement benefit obligations, employee costs rose ~11% YoY (2% QoQ). Even overhead costs witnessed a spike of 34% QoQ / 22% YoY primarily attributable to two factors: i) increased DIGC premium on deposits, which is having a double whammy impact of rise in premium rates as well as higher deposit growth; ii) increase in business development and acquisition expenses by >60% with speedy ramp-up of BC network. Consequently, 'opex to assets' ratio settled higher at 2.12% vs 1.95% QoQ. We expect it to settle at 1.85%/1.82% for FY22E/FY23E respectively, while increased levers of income should aid the bank gradually reduce the 'cost to income' ratio to 52% by FY23E from currently 54.5% for Q4FY21.

- Efficient use of capital helped curtail 'RWA to assets' ratio: This ratio settled at 49.6% vs 53.1% in FY20, down 352bps YoY. Overall, for FY21, CET-I stood at 10.02% (up 40bps vs FY20) while overall capital adequacy ratio was healthy at 13.74% (up 68bps vs FY20 levels). In terms of fund raising, the bank would assess the situation post covid. However, it believes current capital with internal accruals will be sufficient to manage near-term growth.

- YONO expanding rapidly, thereby achieving disproportionate share: SBI added 4.1mn registrations through the flagship YONO app in Q3FY21 taking cumulative registrations to 37.1mn vs 32.8mn in Q3FY21, registering a growth of 12% QoQ. 68% of new saving accounts, or 1.89mn in absolute terms, were sourced through YONO in Q4FY21. Also, YONO is adding cross-sell and, during the quarter, SBI was able to procure MF gross sales of Rs8.5bn through it.

Shares of STATE BANK OF INDIA was last trading in BSE at Rs.401.1 as compared to the previous close of Rs. 384.55. The total number of shares traded during the day was 9416849 in over 78920 trades.

The stock hit an intraday high of Rs. 404.4 and intraday low of 378.1. The net turnover during the day was Rs. 3704489084.

Source : Equity Bulls

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