ROE expected to recover to 13% in FY20E; FY19e EPS cut 18% on treasury losses while FY20e EPS is up 8%; TP raised to Rs 350
SBI Q1 loss of Rs 49 billion was on account of Rs 83 billion of treasury loss. While NPA slippages moderated (~3% of loans), operating performance (adj. for recovery) was muted with pre-prov. profit up only 12% (PPoP ROA 1.35%) despite 15 bp NIM expansion.
Overall loan growth was muted (+4% y-o-y) as overseas book contracted (-12% q-o-q). Domestic loans grew (7% y-o-y), led by 14% growth in retail loans. LDR is comfortable at 68% and CASA improved 110 bp y-o-y to 45%. However, muted fee and sharp 20% y/y rise in opex (led by pension provision) saw core PPoP grow 12%.
GNPAs declined on back of IBC led recoveries and moderation in slippages (~3% of loans). ~90% of corporate slippage was from known stress and non NPA stress is now down to 1.3% of loans. However, slippage in other segments picked up. Credit cost was elevated at 2.6% as coverage improved 300 bp, to 53%.
As credit costs and NPAs moderate, expect ROE for SBI to recover to 13% in FY20e. With the stock at 0.9x core FY20 P/B, maintain Outperform. Cut FY19 EPS by 18% on higher treasury losses. FY20 EPS rises 8%; TP rises to `350 (from `322) on roll forward.
Operating performance muted
SBI reported a Q1 loss of `49 bn, largely on the back of large treasury losses of `83 bn, which the bank opted to not defer over the four quarters unlike other PSU banks. Loan growth was muted (+5.5% y-o-y, -2.8% q-o-q), as the international book contracted (-12% q-o-q). Domestic loan growth was also relatively muted (+7% y-o-y). Management is targeting ~10% domestic loan growth in FY19. Deposit growth was also muted (+1.5% q-o-q, 5.6% y-o-y); however, it outpaced loan growth and LDRs declined further to 68%. NII growth was strong (24% y-o-y) and NIMs improved 45 bp y-o-y; however, this was aided by recoveries, adjusted for which NII grew 13% and NIMs improved 15 bp. Core operating profits adjusted for one-offs grew 13% y-o-y.
NPAs decline, slippages moderate
Reported NPA levels declined as seen with other corporate banks on the back of IBC led recoveries. Slippages also moderated for the bank (~3% of loans) and a large share (~91%) of corporate slippage was from the watch list. NPA additions included `40 bn of non-fund NPAs which crystalised this quarter and management expects the pace to moderate, as the balance is down to 0.7% of loans. NPAs will continue to come down, as bank expects large share of recoveries in IBC cases to come through in Q2 itself.
Profitability to improve in FY20
While CET-1 is comfortable at 9.8%, the bank would look at non-core asset sales, and is looking to sell 4% stake in its general insurance subsidiary to help improve capital. The bank has also reduced RWA by 8% q-o-q. We expect RoE for the bank to recover to 13% in FY20e.