SBIN surprised negatively on asset quality in Q1 while loan growth was much weaker than expected. We expect RoEs to remain muted for the rest of FY18e in line with other corporate banks, turning the corner only in FY19e. Roll fwd to June18E. Lower price target of Rs 325. Retain Buy.
Asset quality pain remains
Total consolidated stressed assets were 9.94% of net advances. Both the gross and net NPA ratios saw a spike, being 9.89% & 5.91% vs. 9.06% & 5.15% q-o-q respectively. The watch-list stood at 1.35% of net advances of the proforma banking entity vs. 1.74% q-o-q. Consolidate slippage ratio was elevated at 5.8% vs. 6.3% in full year FY17. PCR fell to 42.8% vs. 45.6% q-o-q.
Slippages, credit cost guided lower
Based on the bank’s calculation, the slippage ratio of fresh slippages excluding addition to existing NPA accounts as percentage of period-opening gross advances was 5.78% in FY17 and 5.38% in FY18. The bank expects this to moderate to below 3.3% for full year FY18, implying fresh additions to NPAs of `644 bn for the full year. Management has guided for a FY18 credit cost of below 2.25% vs. 2.48% in Q1FY18 & 2.9% in FY17.
For the pro-forma bank, NII was down 3.5% y-o-y, led by weaker NIM of 2.36 % vs. 2.84% y-o-y and flat loan growth of 0.5% y-o-y. Core fee income growth was strong at 16.2% y-o-y. Core PPOP was weak, falling 2.1% y-o-y. Provisioning was 31.5% lower y-o-y. While provisions for NPA grew 7.6% y-o-y, some standard asset provisions were written back on account of slippage of rstd. standard advances. Net profit was Rs 20.05 bn, up 436% y-o-y on a low base.
We have cut earnings sharply on lower growth expectations, resulting in weaker growth in NII and fee income and consequently higher expense ratio. For the merged bank, we have increased credit cost assumption in FY18e. The weakness is somewhat moderated owing to the savings rate cut announced by the bank resulting in marginal NIM expansion. We forecast FY17-20E adj. BV CAGR of 19% consolidated and 18% standalone.
SBIN trades at 1.3x consol adj. BV and 12.5x EPS. We value it at Rs 325, implying P/B & P/E multiples of 1.3x (Jun 18E) and 8.9x (12m to Jun 19E). This compares with 10-year average of 1.8x and 14.6x, respectively. Our valuation uses an equal weighted P/B, P/E, residual income and SOTP models. We use cross-cycle RoE of 13.5% with CoE of 12.4% (beta: 1.2), factoring in 50% loss in book value owing to Gross NPAs and other impaired assets. Key risks: Weak asset quality, weak loan growth.
Asset quality pain remains, but guided to moderate
The total stressed assets (net NPA + net outstanding standard restructured + standard 5/25 + standard SDR + standard S4A) for the consolidated entity stood at 9.94% of the net advances at the end of Q1FY18. Both the gross and net NPA ratios of the consolidated entity saw a spike, being 9.89% and 5.91% vs. 9.06% and 5.15% q-o-q, respectively. The watch-list comprising stressed corporate exposures stood at 1.35% of the net advances of the pro-forma banking entity vs. 1.74% q-o-q.
The consolidated slippage ratio continues to remain elevated at 5.8% vs. 6.3% in full year FY17. Provision coverage ratio reduced to 42.8% vs. 45.6% q-o-q. The bank’s exposure to the 12 accounts referred to the NCLT as per RBI directive is Rs 502.47 bn, against which the total provision held is Rs 199.43 bn. The bank is required to make incremental provision on these accounts of Rs 85.71 bn over the remaining three quarters of FY18. Out of this, the ageing provisioning on these accounts is Rs 50.34 bn for FY18, implying an additional provision of Rs 35.37 bn on account of the RBI directive.
Based on the bank’s calculation, the slippage ratio of fresh slippages (excluding addition in loans to existing NPA accounts) as a per cent of period-opening gross advances was 5.78% in FY17 and 5.38% in FY18. The bank expects this to moderate to below 3.3% for full year FY18, implying fresh additions to NPAs of Rs 644 bn for the full year. Out of these, Rs 304 bn will be contributed by the retail, SME and agri loan book, while the remaining Rs 340 bn will come from the corporate book, largely from the watch-list of Rs 324 bn at the beginning of FY17. In Q1FY18, the retail slippages were substantially elevated at Rs 179 bn, 59% of the full year guidance of Rs 304 bn.
Management attributed this largely to rationalisation of accounts below Rs 500m in the erstwhile subsidiary banks with those of the erstwhile parent bank, as well as to the effects of demonetisation (Rs 20 bn on account of accounts coming out of the RBI forbearance) and farm loan waivers. Out of the Rs 179 bn slippages, 35% were from SME loans, 40% from agri, 14% from housing and 11% from the priority segment. Six states covering the base locations of the erstwhile subsidiary banks and those impacted by farm loan waivers accounted for 70% of the agri slippages. However, the management is confident of substantial recoveries from this portfolio, guiding for the net increase in NPAs from this book to reduce to Rs 75 bn for the full year vs. Rs 135 bn seen in Q1FY18.
Corporate slippages were Rs 83.63 bn in Q1FY18. Out of this, Rs 79.76 bn (95%) came from the watch-list of Rs 324.27 bn, which now stands reduced to Rs 244.44 bn. Management guidance of overall slippage and non-corporate slippage implies corporate slippages to be Rs 340 bn in FY18, out of which bulk of the slippages are expected to be from the watch-list. If we extrapolate of the share of watch-list related slippages in the total corporate slippages for the quarter to this implied full year slippage guidance, we can conclude that the entire watch-list is at risk of slipping to NPA.