Stock corner: Maintain ‘buy’ on SBI Life, growth to remain a concern

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Published: October 22, 2019 2:03:55 AM

Annuity products were repriced slower in H1FY20 but the company is repricing its annuity products faster now; and for guaranteed return (non-PAR savings products), part of the positive impact of the hedges is not reflected in VNB margins while the negative of reducing spreads is captured in the VNB.

Stock corner, buy, SBI Life, SBI, market news, SBI Life insurance, SBI Life equity fund, SBI Life shareSBI Life’s VNB margin improved by 100 bps y-o-y in H1FY20 from 19.2% in H1FY19 to 20.2% in H1FY20.

SBI Life’s VNB margin improved by 100bps y-y in 1HFY20 with 400bps of positive impact from higher share of protection and non-PAR savings business and ~300bps of negative VNB margin impact coming from interest rate impact. We believe that a good part of the ~300bps margin impact on account of interest rate was one-off: Annuity products were repriced slower in H1FY20 but the company is repricing its annuity products faster now; and for guaranteed return (non-PAR savings products), part of the positive impact of the hedges is not reflected in VNB margins while the negative of reducing spreads is captured in the VNB.

Nomura view: SBI Life continues to deliver on all qualitative metrics such as protection growth, lower cost ratios and improving persistency. We factor in VNB margin of 22% for SBI Life in the long run but there could be more upside if the company can improve the product mix with effective hedging. In the near term, growth will remain a concern as in the past 2-3 months industry growth has slowed down. We retain our ‘buy’ rating on SBI Life. Relatively, we prefer ICICI/Axis Bank (we rate both as ‘buy’ as well).

H1FY20 VNB margin — what happened? SBI Life’s VNB margin improved by 100 bps y-o-y in H1FY20 from 19.2% in H1FY19 to 20.2% in H1FY20. There was a positive impact of 400bps from higher share of protection and non-PAR savings business and ~300bps of negative VNB margin impact from interest rates. While the VNB sensitivity of SBI Life has increased with the higher share of non-PAR savings products, we believe the ~300bps margin impact reported in H1FY20 was largely driven by one-offs and will reverse going forward if the business mix remains the same as H1FY20.

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