This would represent sharp improvement, but our confidence in these estimates is not very strong. There is a credit crunch going on in India among weaker-rated borrowers as flow of credit from challenged lenders has stalled.
We raise our F21 and F22 EPS estimates ~5% each, as the tax rate cut outweighs lower margins. We downgr-ade to EW; upside appears limited given uncertainty on asset quality (for SBI and the system) and NIMs. We prefer large private banks where we see better EPS progression and re-rating.
Uncertainty around asset quality has remained elevated: We estimate credit costs at 180 bps for F20 and 125 bps for F21,vs. ~270 bps in F19. This would represent sharp improvement, but our confidence in these estimates is not very strong. There is a credit crunch going on in India among weaker-rated borrowers as flow of credit from challenged lenders has stalled. We do not see any signs of this reversing yet, implying risk of continued defaults at these borrowers (small and mid-sized corporates across sectors). Given SBI’s size, it is one of the largest lenders to many of these stressed borrowers. The other risk would be if SBI were asked to help any of the challenged lenders should they face distress. We view re-rating as unlikely unless the macro situation were to stabilise or improve.
Lower tax rate is a benefit – we raise EPS estimates5% each for F21and F22: We expect the F20 EPS impact to be negative given DTA reversal, which is meaningful for banks with NPL issues in the past few years. We estimate capital will be negatively affected by <20 bps. In F21/F22, the tax rate will decline from 34% to 25%, which should affect EPS positively. We have reduced our F20 and F21 NIM assumptions ~10 bps each, driven by a move to repo-linked loans in housing. The relatively slow recovery process could also weigh on NIM improvement as recoveries would have contributed directly to NIMs.
Limited upside drives downgrade: 0.8xF20e book isn’t expensive, but the uncertainties we see facing the bank are not favourable for multiples. In this cont-ext, we find 9% upside to our price targ-et of Rs330 (unchanged) unattractive.
Why not UW? The liability side of the balance sheet is strong; liquidity is strong and capital is relatively stable (vs. other SOE banks). Core PPoP CAGR is still good at ~19% over F19-22e, driven by cost. We see strong performance at subs. At current prices, SBI’s life business stake is ~15% of its market cap (after 20% holdco discount).