While most of these businesses are strong on growth and/or profitability, the key concern is on the parent where the scope for valuation expansion is the highest.
SBI had an analyst day to discuss the performance of its key subsidiaries. Key takeaways: (i) focus on cross sell with the customers of the bank, (ii) life insurance has scope for margin expansion and a better product mix, (iii) general insurance business has gained momentum and appears to be sustainable, (iv) credit card business is strong on growth and profitability. While most of these businesses are strong on growth and/or profitability, the key concern is on the parent where the scope for valuation expansion is the highest. Maintain Buy, target price revised to Rs 380 from Rs 400 earlier.
Key takeaways: most subsidiaries looking good and delivering better growth: SBI highlighted the following of its subsidiaries: (i) focus on cross sell with the parent for each of its products as there is ample scope for growth at relatively lower cost of acquisition, (ii) life insurance: increase contribution of protection from 5-6% currently and focus on multiple levers such as product mix, operating efficiency and persistency for margin expansion, (iii) general insurance: business is profitable with strong growth in premiums led by higher share of rural mix, product diversification and better distribution, (iv) asset management business is already a top-5 player with a meaningful market share of ~9% of AUMs, (v) credit cards: 40% CAGR spend growth and 33% CAGR in revenues since FY2015 with 2.3% write-offs and delivering 30% RoEs, (vi) SBI Caps is gradually changing its business model but is delivering strong profits currently, (vii) two of their key RRBs are profitable and ready for listing.
Rerating of the parent is crucial given its contribution to the overall value of the bank: The recent weakness in stock performance can be attributed to (i) changes to guidelines on balance of stress recognition and consequent provisioning on these loans, (ii) sharp rise in interest rates leading to higher MTM losses in the investment portfolio, (iii) secondary impact caused by the recent scam at PNB. Given the level of stress already reported, it appears to be highly unlikely that there are large numbers of stressed loans that have not been identified. However, we note that (i) better recovery trends on the steel portfolio where the bank has adequate provisions, (ii) marginal recovery in loan growth resulting in better pricing power is largely being ignored. We feel that the upside is far higher in the bank.
Revise TP to Rs 380 from Rs 400 as we factor in higher credit costs for Q4FY18 and FY2019: We maintain Buy rating on SBI and revise target price to Rs 380 (from Rs 400 earlier) as we incorporate higher provisions for bad loans and investment depreciation for Q4FY18 and FY2019. The recent regulation on asset classification is likely to frontload the balance of stress for the entire sector. At our target price, we value the bank at 1.5X book and 7X March 2020e EPS for RoEs in the range of ~12% in the short-term. We have not made too many adjustments to the subsidiary valuations given that the largest contribution for these subsidiaries is coming from the life insurance business.