Stock corner: Maintain ‘buy’ on SBI on undemanding valuations

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October 30, 2019 12:18 AM

The watch list (standard IBC + SMA 1/2) is at Rs 26,000 crore (1.2% of loans); including one more large HFC and a telecom group, we estimate the total stress pool at 2.2% of loans, which looks manageable to us now.

We expect SBI’s PPOP to post a ~14% CAGR for FY20-21 and that coupled with credit costs normalisation should lead to ROE of >13% by FY21. We expect SBI’s PPOP to post a ~14% CAGR for FY20-21 and that coupled with credit costs normalisation should lead to ROE of >13% by FY21.

State Bank of India’s (SBI) Q2FY20 saw a beat on asset quality vs our muted expectations. PPOP was in line with a positive NII, offset by higher-than-expected opex.

Granular slippages normalised and corporate stress formation was also low at Rs 3,400 crore. The watch list (standard IBC + SMA 1/2) is at Rs 26,000 crore (1.2% of loans); including one more large HFC and a telecom group, we estimate the total stress pool at 2.2% of loans, which looks manageable to us now.

We expect SBI’s PPOP to post a ~14% CAGR for FY20-21 and that coupled with credit costs normalisation should lead to ROE of >13% by FY21. We value SBI’s subsidiaries at Rs 110 per share, and the core bank valuation at <0.6x Sept-21F book remains undemanding. We reiterate our ‘buy’ rating with a lower target price of Rs 400 per share (1x Sept-21F book vs 1.1x June-21F book + Rs 110/share for subs).

Asset quality — good quarter; better to factor in lumpy risks: Slippages at Rs 9,100 crore were lower than we had expected with granular slippages normalising back to Rs 5,200 crore and lower corporate slippages of Rs 3,900 crore. The bank has indicated SMA and standard IBC book at `26,000 crore (1.2% of loans). Also, we estimate the bank’s exposure to another large HFC and a large telecom operator at ~1% of loans. So, the asset quality risk is 2.2% of loans, which is manageable in our view.

NIM improvement aids PPOP but pension provisioning remains high: Domestic NIM at 3.22%, vs 2.94% for FY19 and 3.01% for Q1FY20, led to 18% NII growth. The management expects to sustain the current NIM. Employee costs grew 17% y-o-y, mainly due to the impact of lower interest rates on retiral provisions which should not recur in FY21, in our view. We assume lower opex CAGR of 6% over FY19-21. Overall, we expect PPOP CAGR of 14%.

ROE of 13.4% — valuation at 0.6x Sept-21F book looks undemanding: We expect ROE of 13.4% by FY21, and adjusted for the subsidiaries’ valuation of Rs 110 per share, the current valuation at 0.6x Sept-21F book seems reasonable and, hence, we maintain our ‘buy’ rating.

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