State Bank of India rating – Buy: Results show fresh vigour in operations

Management indicated that margins can remain stable in the range of 3.2-3.3%.

Key observations on Q2FY22 earnings performance: Provisions of Rs 1.9 bn were low as SBIN (i) utilised contingent provisions to the tune of Rs 29 bn and (ii) recoveries from a large NBFC account were adjusted. Adjusted for this, provisions were 1.2% of loans (1.6% in Q1FY22). Operating profits, adjusted for the two one-off items (provision for family pension of Rs 74.2 bn and interest on income tax refund of Rs 19 bn) would be ~Rs 162 bn (vs reported operating profits of Rs 106.7 bn).

Highlights from commentary: Management indicated that margins can remain stable in the range of 3.2-3.3%. The bank will see a gradual reduction in the cost-to-income ratio as it expects expense growth to lag income growth. With expectations of loan growth of c10%, management was confident of gaining market share. Asset quality in Xpress credit loans is performing better. A large part of slippages came from corporate loans and an increase in retail restructuring largely came from the home loan segment. The bank has disbursed cRs 260 bn under the Emergency Credit Line Guarantee Scheme, of which 2% has slipped into NPA thus far.

We increase EPS by 6.5%/5.9% /2.9% for FY22/23/24: We revise our margin, operating income and credit cost estimates. For FY22e, we factor in one-off contingent costs of Rs 74.2 bn. Our FY23-34e cost assumptions remain broadly unchanged. We cut operating profits for FY22/23/24e by 11.1/3.4 /2.0% respectively. Given a more sanguine asset quality outlook, we moderate our credit cost estimate to c1% for FY22-24e versus 1.2% (average) earlier. We estimate ROA/ROE of c0.9% RoA, c15% RoE by FY24e.

A re-energised franchise: SBIN’s core banking business is set for a re-rating in our view given visibility on sustained 10-12% credit growth and 15% RoE, which should allow it to generate c40% CAGR in recurring EPS over FY21-24e. Much stronger core business momentum than earlier and best-in-class RoEs will likely attract higher multiples. We value the core business at 1.5x FY23e BVPS (1.1x earlier). We value the other businesses at Rs 185/share. We raise our TP to Rs 650 from Rs 530 based on our SOTP approach.

Downside risks: Elevated asset quality risk and inability to improve margins.