Core showing improved across parameters in Q3; FY19e EPS down 22% due to higher coverage; TP up to Rs 353; ‘Buy’ maintained
State Bank of India (SBI), after muted earnings for the past many quarters, posted a respectable PAT in Q3FY19 of `39.5 bn with improved prospects.
Q3 clocked sustained improvement across operating metrics, better asset quality and significant MTM investment write-backs (of `80 bn). Key highlights: (a) slippages were curtailed at sub-2% (on guided path). While there is perceived risk on a few chunky exposures, recoveries from assets under NCLT and Samadhan scheme will drive asset quality improvement. Management is confident of maintaining slippages and credit cost at sub-2% each; and (b) core performance improved across parameters—domestic loan growth of >15% and better NIM.
Factoring higher coverage, while we prune FY19e EPS by 22% (albeit on low base), we maintain FY20e EPS as normalised slippage with resolution of stressed assets imparts better earnings visibility. Rolling over, we revise our SOTP-based TP to Rs 353 (earlier Rs 342) and maintain Buy. SBI, being better positioned among peers—CET-1 at 9.57%, NNPL at 3.95% and CASA at 45%—we reiterate it as our top pick (amongst PSU banks) to play corporate recovery.
Incremental stress lower; guidance maintained
Slippages were curtailed at <`66 bn (1.6%) with 20% from the corporate segment. This, coupled with higher write-offs, drove GNPLs down q-o-q to 8.71% (from 9.95%). Further, eight accounts (with exposure of `340 bn) are in advanced stages of resolution. This, along with curtailed slippages, will keep headline GNPL under check. Given increased coverage, guidance of sub-2% seems reasonable. Key trends determining credit cost will be NCLT recovery and power sector resolution (possible write-back of Rs 60 bn).
Business momentum perking up; best placed to catch opportunities
SBI clocked steady improvement in operating metrics (domestic loan grew >15%, better NIM). Armed with a strong franchise and slackened competition, SBI aims to build on business momentum with focus on better-rated corporates. That said, higher opex (pension & wage revision) and softer fee restricted core profitability. We believe improving growth with steady/improving NIM will boost revenue momentum.
Outlook: Better positioned
SBI is better positioned to capture emerging opportunities amidst slackened competition. Further, value in non-banking subsidiaries will be more stable and scalable. Ascribing `80/share to subsidiaries, the stock trades at 0.8x FY20e P/BV. We maintain ‘BUY/SO’.