SBIN earnings have been suppressed over past several years owing to challenges on asset quality, merger issues and adverse rate environment. However with bulk of asset quality cleansing behind and sharp decline in watch-list size to INR203b (1% of loans) we expect credit cost to decline sharply, thus paving way for earnings recovery. Net stressed assets at 5.9% of total loans has also been showing improvement while PCR has increased sharply from 43% in 1QFY18 to 54% currently (71% including tech. w/offs).
We factor in FY19E slippage of INR460b vs avg. slippage of INR1.08t in FY17-18. SBIN has provided well on its NCLT exposure (PCR of 64% in NCLT List-1 and 78% in List-2) which will drive healthy write-backs over next two quarters and will help offset the provisioning requirement towards stressed power assets. The recent moderation in bond yields will provide significant boost to treasury performance which coupled with potential monetisation in subsidiaries will drive healthy growth in other income. We thus conservatively expect RoA/RoE to improve to 0.7%/13.3% by FY21 and revise our target price to INR360 (1.2x Sep-20E ABV for the bank + INR79 per share for subs). Maintain Buy.
SBIN has increased its 1-year MCLR by 60bp since Jan’18 (advances yield for SBI has moved by only 5bp during similar period) which will drive an improvement in lending yield as portfolio re-pricing occurs. Further, with sharp moderation in NPL formation and decline in net stressed assets we expect interest income to get a boost as reversals subside. Pick-up in systemic credit growth and ongoing turmoil in NBFC space have lent increased pricing power and growth opportunities to banks and we expect SBIN to benefit from the prevailing macro conditions. SBIN term deposit rates are at significant discount to other larger peers which will help it maintain strong control on funding cost.