SBI: Moving to EW amid asset quality uncertainty

We raise our F21 and F22 EPS estimates ~5% each, as the tax rate cut outweighs lower margins. We downgr-ade to EW; upside appears limited given uncertainty on asset quality (for SBI and the system) and NIMs. We prefer large private banks where we see better EPS progression and re-rating.

Uncertainty around asset quality has remained elevated: We estimate credit costs at 180 bps for F20 and 125 bps for F21,vs. ~270 bps in F19. This would represent sharp improvement, but our confidence in these estimates is not very strong. There is a credit crunch going on in India among weaker-rated borrowers as flow of credit from challenged lenders has stalled. We do not see any signs of this reversing yet, implying risk of continued defaults at these borrowers (small and mid-sized corporates across sectors). Given SBI’s size, it is one of the largest lenders to many of these stressed borrowers. The other risk would be if SBI were asked to help any of the challenged lenders should they face distress. We view re-rating as unlikely unless the macro situation were to stabilise or improve.

State Bank of India