We retain the Buy rating and price target of R400, based on an SOTP (sum of the parts) model; it implies 1.5x FY17e P/BV (price-to-book value) and 10.5 FY17e P/EPS (price-to-earnings per share) for the standalone bank. The life insurance business is given R18.4 per share based on appraisal value, but with a 15% discount for disclosure gaps.
Potential reforms, turn in NPL cycle key catalysts: With notable improvement in asset quality in the last quarter, SBI remains our top pick among SOE (state-owned) banks. We believe SBI will be the biggest beneficiary of lower interest rates, easing liquidity and a pick-up in economic growth given the higher stress in the mid-corporate and SME segments. With a comfortable capital position, valuations also appear inexpensive at a five-year average. Any structural reforms of SOE banks would add to re-rating of SBI.
SBI Life—best in class on cost ratios and balanced product mix: SBI Life Insurance has a solid agency force aided by SBI and its associate banks’ strong branch and distribution network. It has consistently remained among the top three private insurers since FY07 and reported an APE CAGR (compound annual growth in annual premium rate equivalent) of 15% over FY13-4 vs a marginal decline in the sector, At end-FY14, PAR (participating), non-PAR and ULIPs constituted 31%, 37% and 32%, respectively, of total premium. Its cost-premium ratio (at 17% in FY14) is the best in class which offsets low persistency in later years. We see premium CAGR of 15% over FY15-17.
Accounting profit to grow by 5-7% in FY16-17e: SBI Life’s accounting profit rose 26% over FY12-14 and earnings quality was also solid, with income from investments contributing only 27% to profit before tax. Given the high base, we expect accounting profit growth to moderate to 5-7% in FY16-17. ROE (return on equity) and return on EV (enterprise value) were good at 24.5% and 10.4%, respectively, in FY14.