STATE BANK OF INDIA: Asset quality/margins surprise positively; one-off gains further boost earnings
(SBIN IN, Mkt Cap USD35.4b, CMP INR282, TP INR350, 24% Upside, Buy)
– SBIN reported better-than-expected PAT of INR30.1b (+30% QoQ) in 2QFY20, led by robust NII and the stake sale in SBI Life (INR34.8b). The bank continued with ~35% corporate tax and will migrate to the new regime in 4QFY20.
– NII grew 7% QoQ to INR246b (our estimate: ~INR234b), led by 20bp sequential expansion in the domestic margin. Adj. PBT stood at INR15.7b versus INR18.1b in the year-ago period. For 1HFY20, PPoP grew 4% YoY, while PAT stood at INR53.2b v/s a loss of INR39.3b for 1HFY19.
– Other income grew 28% YoY to INR120.3b in 2QFY20, led by the stake sale in SBI Life. Core fee income was flat YoY at INR50.4b. Opex grew 12% YoY to INR184.2b, led by 17% YoY increase in employee expenses. SBIN made a provision of INR9.9b toward arrears of wages in the quarter.
– Loan growth stood at 9.6% YoY, driven by retail loans (+18.9% YoY), while the corporate book grew at a modest pace of 2.8% YoY. Deposit base increased 8% YoY with a CASA mix of 45.1% (stable QoQ).
– Fresh slippages declined to INR88b, with corporate slippages moderating to INR32.4b from INR53.5b in 1QFY20. Agri slippages at INR30.8b have largely come from two states that have announced a farm loan waiver. Higher write-offs of INR120.5b facilitated a 4.1% QoQ decline in GNPLs. Provision coverage ratio improved ~190bp QoQ to 62.9% (81.2% incl. TWO). SBIN made additional provision of IRN14b toward the stressed HFC, taking the total PCR to 20% and another INR26b toward the non-fund-based energy exposure. SMA 1 and SMA 2 book stands at ~INR93b v/s ~INR103b in 1QFY20.
– Analyst meet highlights: (a) Outstanding DTA as of 2QFY20 was INR70b v/s INR100b in FY19. (b) Bank’s exposure to Mudra loans is ~INR260b (NPA: INR40b). (c) 15 standard stressed accounts where ICA is signed/likely to be signed of INR16.8b. Entire SMA book overlaps with these stressed accounts.
– Valuation view: SBIN reported a moderation in slippages across segments (after elevated slippages in 1Q), while it prudently used the gain from the stake sale in SBI Life to create higher provisions. The bank carries sufficient provisions to cushion earnings; however, given the macro slowdown and the limited visibility on the resolution of large stressed accounts, we expect credit cost to stay elevated over the near term. Margins have improved but appear to have peaked out as monetary easing continues exerting pressure on incremental yields. We fine tune our earnings and estimate SBIN to deliver PAT of INR199b/INR296b in FY20/21 (+1.3%/2.6%). Maintain Buy with a target price of INR350 (1.1x FY21E ABV for the bank).