Despite overall growth being slow, valuation multiples are expected to improve owing to better RoA/RoEs; TP up to Rs 400.
We see a few tailwinds emerging for SBI in the medium term: (i) NPL concerns have receded – large risks in sectors like telecom, NBFC have reduced and a large steel resolution has finally fructified – earnings to benefit; (ii) strong traction in subsidiary businesses and valuations, which now account for ~40% of SBI’s value; (iii) core business remains steady – better NIM, declining operating and credit costs – expect RoA of 0.8% and RoE of 14% in FY22. Adjusting for value of subs, SBI trades at 0.8x FY21e P/B. With NPL fears receding, we expect valuation multiples to start improving in line with better RoAs/RoEs. We value the core bank at 1.0x FY21e book and assign Rs 132 value to subsidiaries. Maintain Buy. Raise TP to `400 (`375 earlier).
Asset quality headwinds have receded
With recent positive developments around resolutions in steel, some relief on telecom/media and progress on the NBFC sector, asset quality worries for SBI has reduced significantly. With the legacy book largely recognised and provided for (incl. w/o assets, PCR at 81.2%), we now expect credit costs to fall sharply from ~250 bps in FY19/~211 bps in H1FY20 to ~119/109 bps in FY21/22. Expect strong near term earnings due to resolution of a steel asset, which will more than compensate for likely incremental provisions for an NBFC asset.
Subsidiaries creating value
Value creation in subsidiaries has been a lot higher than our expectations. Almost all subsidiaries are top 3 in their respective fields and have top quartile return ratios. SBI Life (40% NBP growth), SBI Cards (PAT up 92% for H1FY20) and SBI AMC (AUM up 26% YoY) have done much better than peers and the system. We raise our estimates for value emerging from subsidiaries to Rs 132 per share of SBI.
Sustaining business momentum
While the overall growth remains slow, SBI is sustaining its market share among all lending products and deposits as well. With a better outlook on asset quality, existing pricing power, we expect NIM to improve and cost ratios to decline, resulting in a consistently improving operating profile for the bank.