SBIN (standalone) reported a 7% y-o-y decline in Net Income owing to MTM losses. Core PPOP (+14.4% y-o-y) was 3.6% below our estimate, as a weaker than expected NIM (13bp q-o-q decline) drove weakness in NII (+13% y-o-y, 6% below estimate). Fee income was better (+18% y-o-y), while expenses were controlled (+1.4% y-o-y) resulting in a core C/I ratio of 51.8% (300bp lower y-o-y). While gross slippages were higher, net slippages were at Rs 49 bn (0.8% of 12m prior loans vs 2% y-o-y). Loans growth was strong. Notwithstanding the large MTM losses, we expect SBIN to still manage ~15% RoE in FY23F on the back of lower credit costs. Reiterate Buy with no change in TP of Rs 615 (16% implied upside).
Derivatives loss: SBI likely had large hedge losses on its underlying foreign exposure which would have gained (foreign NIM increased 60bp, from 1.39% in Q4FY22 to 1.98% in Q1FY23), which, if adjusted, may lower NIM by a further ~10bp.
Asset quality trend intact: Gross stressed assets remained flat q-o-q at 5.8% of loans. Coverage on gross stress declined 1.2% to 68.6% as the bank reversed some provisions. Gross and net NPLs declined 7bp and 2bp q-o-q, respectively. COVID-restructured portfolio including SMA1&2 was 1.2% of loans, flat q-o-q. Core credit cost was 62bp although it is highly likely that credit cost may continue to undershoot our expectations.
Focusing on growth: Net loans grew 15.8% y-o-y and was higher than we expected. Sequentially, retail and SME grew 3.2% and 2.4% while corporate was flat. Unsecured loans grew 4.8% q-o-q. Domestic deposits were weak/flat q-o-q, with CASA ratio at 45.3%. We wonder if the growth was partly at the cost of lower NIM which declined 13bp q-o-q.
Reiterate Buy; retain TP at Rs 615
We cut our FY23/24/25F EPS estimates by 2.4/0/2% to factor in M2M loss, and a lower NIM. We expect a 16% CAGR in adjusted core book over FY22-25F. We roll forward by a quarter, but retain our TP at Rs 615, which implies 1.4x P/B (Jun’22) and 10x P/E (Jun’23F) on a consolidated basis. The stock currently trades at 1.4x P/B (consolidated) while core bank is valued at 1x P/B on Jun’22. Our SOTP values the bank at 1.3x P/B, SBI Life at Rs 1,625/share, SBI Cards at Rs 1,175/share, and SBI AMC (unlisted) at 8% of AuM. Risks: slower growth, rising costs, decline in NIM and weakness in unsecured Xpress credit book.