SBI failed to live up to the expectation of a sharp turnaround in asset quality set by BOB and PNB earlier but, in isolation, the trend is promising. Large corporate is still at risk but the massive growth consolidation in the last two years is positive. The cost curve is fully baked, and will be inflecting sooner. With a strong focus on capital preservation—more to be raised—it’s a story worth owning. Retain Buy with price target at Rs 360.
Asset quality trends are positive: Though SBI failed to report a sharp turnaround in asset quality, its impairment formation trend looks promising. The impairment formation ratio (fresh NPA and restructuring) fell to 3.8% after hitting 5.5% in Q4FY15. The negative surprise was the large slippages in retail loans, attributed to a seasonal slack, usually reversed in Q2. Outstanding net standard restructured assets are 4.4% of loans. At consolidated level, gross and net NPA (non-performing asset) ratio rose by 16 basis points sequentially to 4.48% and 2.38%. Total impaired assets including net NPA are now 7.6% vs. 7.4% of loans sequentially.
Core PPOP (pre-provision operating profit) growth muted (+1.6%) owing to higher base: Fee income grew 12.9%—in sharp contrast to weak loan growth, driven by transactional banking and off-balance sheet exposures (LC/BG). Costs are fully baked in. Further, wages are tied to inflation (dearness allowance tied to inflation index is 110% of base wage and could come off as inflation cools off further).
Loan growth was muted; expect to recover to 14%: SBI continues to be very conservative with loan growth of 6.8%—domestic loan book up a mere 5.4% —similar story for its associate banks. We remain hopeful that revivals will take shape towards H2 and pencil in 14% loan growth.
Cut estimates: We have cut standalone EPS estimates by 5-8% over FY16/FY18. We expect NIM (net interest margin) to see some more compression, marginally higher expense ratio and slightly higher credit costs as the environment continues to remain tough. We forecast FY15-18 EPS CAGR (compound annual growth rate in earnings per share) of 26%.
Valuation/risks: SBI trades at 1.7x consolidated book value (June 15) and 8.9x EPS (12 month to June 16). We roll forward by a quarter and value SBI at R360, which implies a P/B (price-to-book) and P/E (price-to-earnings) multiple of 1.7x (June 16) and 9.2x (12 months to June 17). This compares with 10-year average of 1.5x and 9x, respectively.
Asset quality trends are positive: SBI’s impairment formation ratio (fresh NPA and restructuring) fell to 3.8% after it had hit 5.5% in Q4FY15. While restructuring, including disbursals, came in line, slippages were a lot higher at R73 bn – the negative surprise was the large slippages in retail loans. The management attributed this to a seasonal slack in tracking payments owing to internal personnel movements/promotions. Slippage from restructured assets were R12 bn, implying a slippage ratio of 14% (based on two-year prior restructured book)
Gross NPA increased to 4.29% from 4.25% sequentially, while net NPA rose 2.24% from 2.12%. Provision coverage number improved to 69.5% (including written- off assets), although it fell marginally to 49.2% on a core basis, which likely reflects sale or write-off of NPAs, which have higher coverage ratios. Outstanding net standard restructured assets are 4.4% of loans and inclusive of net NPAs are 6.6% of loans. At consolidated level, gross NPA ratio went up 4.48% versus 4.32% sequentially, while net NPA ratio increased to 2.38% from 2.23%. Total impaired assets including net NPA are now 7.6% of loans versus 7.4% of loans sequentially.
Net interest margin declined with cut in base rate: Domestic NIM fell almost 35bps with two base rate cuts taken by the bank. Calculated yield on assets also fell 34 bps, even as cost of deposits remain firmly up. The RoA/RoE (return on assets/return on equity) profile is still weak at 0.72%/ 12.3% for the quarter.