Analyst corner: SBI to outperform from current levels – Axis Capital

Q4 operating profit (Rs 169.3 bn; up 7% y-o-y) was higher than expected, but PAT (Rs 8.3 bn vs. estimate of `39.1 bn) was significantly below expectations, primarily on higher provisions.

Positives in Q4: (a) Loan growth picked up at 13% y-o-y; (b) NIM improved 2 bps q-o-q 2.78%; (c) GNPA ratio down 118 bps q-o-q at 7.5% and (d) PCR increased ~500 bps q-o-q to 61.9%. Slippages were lower than expectations at `79.6 bn (1.6% of loans vs. 1.4% in Q3FY19).

Management has optimistically guided for 0.75-1% RoA in FY20 with focus on core operating profit. With return of pricing power, resolution of some large lumpy NCLT cases (`160 bn from 3 cases in near term), slowdown in slippages and adequate capitalisation, we expect SBI to outperform from current levels.

(a) Loan growth picked up at 13% y-o-y driven by corporate (up 14.8% y-o-y; 39% share) and retail (up 18.5% y-o-y; 13.2% share) books.

NBFC portfolio buyouts (Rs 190 bn) during FY19 drove growth in corporate book; (b) Fee income growth was weak at 1.9% y-o-y chiefly due to lower charges on maintenance of minimum balance in savings accounts. Loan processing charges grew strong 10.4% y-o-y tracking healthy growth in advances and (c) Sharp improvement in GNPA was driven by 327 bps q-o-q dip in corporate book GNPA to 13.6%. Agri and retail GNPA ratio was largely flat at 11.6% and 1.0%, respectively.

With signs of pickup in private sector capex, we expect credit growth to regain momentum and build in 13.5% loan CAGR for SBI over FY18-21. We also expect margin to expand on declining interest reversals and reflation of asset yields (pricing power coming back).

More than adequate provisioning on NCLT accounts and limited slippages from corporate accounts provide additional comfort. However, high standard exposure to IL&FS and DHFL is bit concerning; we will track developments and risks from these exposures. SBIN trades at 1.3x/1.1x FY20E/FY21E P/ABV (adj. for subsidiaries/JV valuations). Target to achieve 0.75-1% RoA by FY20 with core PPOP target of `700 bn (`850 bn with expected `150 bn of recovery from 3 IBC-1 cases and `900 bn with stake sale in subsidiary).

State Bank of India