SBI rating: buy; Not much to cheer about in results

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Published: August 12, 2019 1:29:54 AM

FY20/21/22e EPS down 7.8/3.2/5.5% due to slower loan growth; valuations below historical average;‘Buy’retained.

SBI rating, State bank of india, IBC recovery, fee income growth, Net stress, NBFC exposureAt 1.2x trailing P/B, valuations below historical average Retain Buy with PT of Rs 370.

The quarter did not have much to cheer about. Core-pre provisioning profits (extreasury) were down 3.6% y-o-y – due to slower loan & fee income growth. NPL formation was elevated as was net stressed exposure at 4.7% (vs 3.9% q-o-q), as a few stressed corporate assets got added. Mgmt guides for core RoA (excluding recovery) of 0.5-0.6% for FY20 with expectation of Rs 150-160 bn of IBC recovery. At 1.2x trailing P/B, valuations below historical average Retain Buy with PT of Rs 370.

Net stress inches up, with recognition of stressed corporate assets in watchlist Gross NPL were 7.5% (flat q-o-q) with overall provision cover (incl. written off) inching up to 79.3%. Slippage in the quarter (Rs 170 bn) were 3.6% (as % of trailing 12m loan), of which Rs 20 bn was from a SOE entity whereas another Rs 20 bn of agri loan slippage was from one state. SMA-1 & 2 (> Rs 50 mn) and other large ticket earmarked stressed assets stood at Rs 248.03 bn. Net stressed assets stood at 4.7% (vs 3.9% q-o-q). Mgmt guidance of 1.4% credit costs for FY20 factors in recovery from written-off/NPL IBC accounts (Rs 150-160 bn from Essar, Bhushan Power & Steel).

NBFCs: Management looks at its NBFC exposure in 4 buckets – (i) government owned, (ii) Institutional, (iii) large corporate houses, and (iv) entrepreneurial NBFCs. Bank is comfortable in lending to first 3 categories, and for the newer one, it prefers portfolio buyouts & co-lending models. Of the outstanding NBFC exposure of Rs 173.6 bn, ~41% was to Government or government backed SOE players, ~38% was to private NBFCs backed by large private sector corporates while ~21% was to other private NBFCs.

Power exposure: Of the total exposure of Rs 2.03 trillion towards the power sector, ~11% is recognised as NPA. Within the standard portfolio, ~69% is to public sector while ~31% is towards private sector. Overall exposure to assets under resolution is Rs 236.8 bn.

Growth improving: Gross loans were up 12.5% y-o-y, domestic loans were up 11.9%. Retail grew at strong 18.7% y-o-y, driven by home loans (+28.5% y-o-y). Auto loans slowed down (+7.3% y-o-y). Industry credit growth was up 11.6% y-o-y, the growth mainly coming from loans to PSUs. Deposits grew 7.3% y-o-y, CASA ratio (domestic) was stable at ~45.1%.

Core PPOP impacted by weaker fee: Core PPOP (ex-treasury) fell 3.6% y-o-y. Domestic margins for Q1 were 3.01%, bank guides for 3.15+% FY20 margins. Est. change: We cut our EPS estimate for FY20 by 7.8% and FY21/22 by 3.2/5.5%, primarily building in slower than estimated loan growth. We have largely maintained our NIM ests., but cut our fee income growth assumption. Higher than expected slippage and delay in recoveries could lead to higher credit costs. We forecast FY19-22E adj. BV CAGR of 9.0% (standalone).

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