SBI reported strong loan growth, healthy NIM, sequential improvement in NPA and credit costs in Q4FY22. In a rising rate environment, and when the competition for deposits is likely to rise dramatically, SBIN is enviably placed with a strong deposit franchise, very low credit-to-deposit ratio (61.6% domestic, 67.5% overall) and low cost of funds. It is also a price-setter for most products like home loans, LAP, corporate loans, SME, etc. With a favourable asset quality cycle, it is ideally placed to deliver healthy loan growth, maintain NIMs and drive a recovery in its RoA/RoE to 0.8%/14% by FY24e.
While we lower our TP to Rs 600 (from Rs 650) to reflect pressure on subsidiary valuations as well as on the multiple assigned to the core bank, the lower TP implies an attractive c35% upside. Among our preferred picks in the space; maintain Buy rating. Downside risks: Lagging loan growth and pressure on fee income impacting PPoP.
We marginally revise our FY23/24 EPS; introduce FY25 estimates: We marginally trim our NIM estimate which leads to an average 5% cut in NII for FY23/24e. However, we moderate operating expense estimates which offsets this pressure. We estimate a PPOP CAGR of 16% and average PPOP RoA of 1.7% over FY22-25e. We maintain our credit cost estimates (average 0.9% over FY22-25e) which leads to an 18% EPS CAGR over FY22-25e / 14% over FY23-25e.
Key observations on Q4FY22 earnings
Loan growth improved to 11.6% y-o-y / 5.8% q-o-q driven by domestic corporates (+11% q-o-q) and retail loans (+5% q-o-q). SME loans (+10% y-o-y, -1% q-o-q) lagged the 8-10% q-o-q growth delivered by large peers.
Core-fee income declined 5% y-o-y, with pressure across several lines. This is a concern and may be construed as the cost SBIN is paying for growth. Reduction in stressed assets (5.6% of loans vs 6.3% in Q3) led to moderation in credit costs.
Highlights from commentary: Management indicated that the utilisation in both working capital and term loans is improving and this could result in robust growth in commercial loans. Given its high share of floating rate loans, the bank could be well placed to maintain its margins at current levels. Asset quality is performing better even in the restructured/ECLGS loans. Management called out a credit cost normalisation in the near term. The bank is experiencing strong customer traction through its YONO application and it will be launching YONO 2.0 with improved digital offerings, better user experience and security.