State Bank of India rating – Buy: Asset quality boosts earnings outlook

By: |
August 30, 2021 3:45 AM

GNPAs down 43% over past 3 years; 14% CAGR in PPOP estimated over FY21-23e; ‘Buy’ retained with TP of Rs 600

SBIN remains among our top Buys in the Banking space with a TP of Rs 600 (1.4x FY23e ABV+Rs 190 from subsidiaries/JVs).SBIN remains among our top Buys in the Banking space with a TP of Rs 600 (1.4x FY23e ABV+Rs 190 from subsidiaries/JVs).

SBIN has demonstrated a strong improvement in asset quality, with GNPAs declining by 43% over the past three years, while PCR increased to 68% currently from 40% four years back. Fresh slippages moderated sharply to 1.2% in FY21 (2.5% in Q1FY22), lower v/s many of its private peers. AUCA book stood at Rs 1.72 trn – higher than the GNPL pool, with recoveries in the 6-11% range. Over the past five years, the bank has recovered ~Rs 400 bn from the AUCA book. We expect the recovery trends to continue as the IBC process gains pace after a long pause due to the COVID-19 restrictions.

SBIN appears well positioned to report strong uptick in earnings, led by moderation in credit cost from FY22. The bank has historically delivered over 15% RoE for 10 years, before the worst phase of the corporate cycle hit earnings to the point that it reported back-to-back losses in FY17/FY18. During FY19-21, SBIN has shown a remarkable improvement in asset quality, reducing net NPLs to 1.8% at present from 5.7% in FY18, while PCR stands comparable to many well-run private banks.

We estimate 14% CAGR in PPOP over FY21-23E (v/s 6% CAGR over FY18-21). Overall PPOP to provision coverage should strengthen to 2.5x by FY23e (v/s an average of 1.3x over FY18-21), while RoE expands sharply to ~15% and reaches their decadal highs in FY23E. SBIN remains among our top Buys in the Banking space with a TP of Rs 600 (1.4x FY23e ABV+Rs 190 from subsidiaries/JVs).

Balance Sheet cleansing largely over; asset quality outlook strong
SBIN’s focus on strengthening its Balance Sheet has enabled a sharp decline in GNPAs to Rs 1.3 trn in FY21 from Rs 2.2 trn in FY18. GNPAs declined by ~43% over the past three years, while PCR increased to 68% at present (85% PCR on the corporate book) from 40% four years back. The bank has cumulatively written off Rs 1.5 trn since FY18. The improvement in asset quality has been sharper than most peers, including private banks. While Q1FY22 saw a marginal increase, we believe that the Balance Sheet cleansing is largely complete, with the focus to shift to earnings recovery and pursuing growth. Controlled restructuring (0.8%) and SMA book (0.5%) provides further comfort on asset quality and will drive a sustained reduction in credit cost.

Subsidiaries remain strong industry-leading compounding machines
SBIN’s subsidiaries – SBI MF, SBI Life Insurance, SBI General Insurance, and SBICARD – have displayed robust performances and turned market leaders in their respective segments. The contribution of subsidiaries to SoTP has increased significantly; they now contribute ~32% to SoTP (~42% on the CMP). We expect the robust performances from subsidiaries to continue and add value to overall SoTP. Valueunlocking from SBI MF and SBI General Insurance could result in further gains.

Valuation and view
SBIN has historically delivered over 15% RoE for 10 years, before the worst phase of the corporate cycle hit earnings. It reported a strong FY21/Q1FY22 in a challenging environment. Deposit growth stood strong, led by healthy CASA trends, while loan growth is likely to recover gradually over FY22-23e. Asset quality outlook remains particularly encouraging. Continued recoveries would further support the earnings momentum. SBIN holds unutilised COVID-related provisions of ~Rs 91 bn, which should limit credit cost. SBIN has reported a RoE of ~9.5% in FY21 – the highest since AQR started in FY16 and is now aiming to reclaim 15% RoE in the medium term. We project a RoA/RoE of 0.8%/14.6% by FY23e, and reiterate SBIN as our top BUY.

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