State Bank of India (SBI) turned in an impressive Q4FY19 performance with a sustained core and strengthening balance sheet. PAT undershot primarily due to increased provisioning pertaining to NCLT accounts and rise in coverage. Key highlights: (i) Slippages were restricted at sub-`80 bn (1.6%); notably, corporate slippages were arrested (despite an aviation account slipping) and provisioning coverage rose to 62% (highest among peers). (ii) While there is perceived risk on a few chunky accounts, SBI’s exposure is low relative to its balance sheet size. Furthermore, recoveries from assets under NCLT (coverage of 93%) and the Samadhan scheme should lift asset quality.
(iii) Core performance improved across the board—domestic loans grew 14% y-o-y along with better NIM.
The strengthened balance sheet is quite encouraging, in our view, and will curtail credit cost, and deliver steady improvement in operating profit. We believe SBI is better positioned among peers – CET1 at 9.62%, NNPL 3% and CASA 45%-plus – and reiterate it as our top pick among PSU banks as a proxy for corporate recovery. Maintain Buy with an SoTP-based TP of `371 based on rollover by one more quarter (versus `353).
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Asset quality tracks guidance; recovery key variable
Slippages were curtailed at <`80 bn (1.6%) with about 30% arising from the corporate segment (including an aviation exposure of `12 bn). This coupled with higher write-offs pushed down GNPLs q-o-q to 7.53% (from 8.71%). Coverage rose further by an impressive 5ppt q-o-q to 62%, largely due to 99% provisioning towards NCLT-1 list (100% on Essar Steel, Alok and Bhusan Steel and Power, which are close to recovery). Higher recovery with curtailed slippages (SMA-1/2 down to <50bps) will keep headline GNPLs under check. A key surprise would be the credit cost benefiting further from NCLT recovery (`160 bn anticipated in CY20) and power sector resolution.
Momentum perking up
SBI clocked a steady improvement in operating metrics (domestic loan grew about 14% y-o-y, better NIM). Armed with a strong franchise and slackened competition, the bank aims to build on the business momentum with focus on better-rated corporates. That said, elevated opex (pension & wage revision) and softer fee restricted core profitability. We believe an improving NIM profile will boost revenue momentum and limited retirement benefit cost will support operating profit growth.
Outlook: Better positioned
SBI is well-positioned to exploit emerging opportunities amid sagging competition. Furthermore, value embedded in non-banking subsidiaries is getting more stable and scalable. Ascribing `83/share to subsidiaries, the stock is trading at an inexpensive 0.8x FY21e P/BV for RoE potential of 14-15% by FY21 (after factoring in ~5% dilution in FY20). We maintain ‘BUY/SO’ with a TP of `371.