With collections at 97%, asset quality should fare better than apprehended; upgraded to ‘Buy’ with TP revised to Rs 270 from Rs 215
Also, SBI has a lower level of contingent provisions, which can keep earnings volatile.
SBI’s Q2FY21 profit of Rs 46 bn (+52% y-o-y) was ahead, led by lower provision. Slippages were lower due to standstill/ moratorium and with collections at 97%, asset quality should fare better than feared. The bank can also leverage strong Casa to grow loans. Moreover, better macro-trends and collections for lenders will address perception-risk of ‘public service’ with the bank. Valuations are attractive, in our view, and we upgrade from Hold to Buy with PT of Rs 270.
Asset quality holding up better: With collections back to 97% of dues, SBI’s asset quality is also holding up better; hence level of restructuring/downgrades should be lower than feared. Gross NPLs are at 5.3% of loans and coverage ratio at 71%. We recognise that stress in the book will still be higher than private banks (due to SME/rural loans) and this is evident from the higher level of standstill loans (0.6% in Sep and 0.5% in Oct) vs. 0.1-0.3% in Sep for private banks.
Also, SBI has a lower level of contingent provisions, which can keep earnings volatile. Nevertheless, we believe that stress should be manageable and can be absorbed by its operating profits.
Strong deposit franchise will aid growth: SBI benefits from a strong deposit franchise that will support market share gains, based on its low funding costs. During Q2, its Casa deposits grew by 15% y-o-y with Casa ratio at 44% of deposits. Lower funding costs helps to offer lower lending rates vs. even the larger private banks — this can help gain share in the better quality corporate loans. During Q2, NII grew by 15% y-o-y led by asset growth of 13% (loans up 6%) and NIM expansion of 20bps. NII growth would have been lower by 1% if the bank had reversed income on standstill loans, alike most peers.
Keeping buffers for upsides to staff cost: During Q2, operating costs grew by 10% y-o-y. This included Rs 10 bn in additional provisioning towards new wage settlement, which mgmt expects to normalise at Rs 6 bn/quarter going forward. We remain watchful about surprises on staff costs and hence build some buffers in our forecasts.
Upgrade to Buy: We believe that with a broader recovery in the Indian economy, the overhang of “public service” on SBI should recede. This, coupled with the earnings upgrade, drives the upgrade from Hold to Buy with a TP of Rs 270 (from Rs 215 earlier) based on SOTP that includes the value of the bank at 0.7x Sep-22 adjusted PB.