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Event update: State Bank of India (Outperformer) - Promising subsidiaries butstress loan news flow will continue to weigh

SBI hosted an analyst day with the Chairman Mr Rajnish Kumar and the top management team addressing analysts. The purpose of the meet was to highlight the core strengths of the bank including its formidable physical and digital networks, progress on bad loan resolutions, strength in retail loans especially housing and personal (Xpress loans) and business strategies of key subsidiaries. The bank highlighted the progress it had made in improving its lending processes in both corporate and retail credit and how it has strengthened the bad loan recovery infrastructure. Management also gave specific guidance on all key financial parameters for both FY20E and FY21E where management has guided to core PPOP being higher and credit cost being lower than street estimates.  We believe the meet did well in highlighting SBI’s progress on building its existing strength in retail liabilities, retail loans, physical and digital platforms, and subsidiaries. These remain the key positives. However we believe near-term focus will remain on what happens to some bulky exposures of the standalone bank especially exposure to NBFCs including DHFL and its exposure to Vodafone Idea. The stock will remain volatile as both negative and positive triggers play out. The key positive triggers would be related to subsidiaries - the listing of SBI Cards by February 2020 and the strong performance of its other subsidiaries including life insurance and MF. In addition, the final judgment on Essar Steel expected by end November will result in a lumpy recovery and serve as a positive trigger. The key negative trigger would be news flow on SBI’s stress loan exposures. We believe news flow on stress loans will overpower in the short to medium term. However, we reiterate Outperformer given SBI’s inexpensive valuation and strong performance of subsidiaries. Our TP is Rs330.

SBI analyst day: Chairman:

• Strong corporate governance with good quality management team and a strong board are the core strengths of the bank.
• Subsidiaries continue to do well. With low penetration rates across segments and huge potential of cross sell plus synergies between SBI and subsidiaries, performance of subsidiaries will continue to improve.
• Guidance of slippage for FY21 is Rs320bn but does not include extreme cases. O/s corporate NPLs are 220bn and LGD is 58% according to Chairman
• Fully written off accounts amount to 370bn while corporate AUCA is 220bn totalling to 590bn which serves as a hidden reserve. 250bn of this can flow back to earnings over two years. This would serve as an offset if there is more than expected slippage in the NBFC or telecom segments.
• External Benchmarking is not likely to impact earnings. Not too many customers are switching to repo-based rates from MCLR so far.
• There is big value in the franchise with 65,000 on-line registrations on YONO daily and 35% share in home loans.
• Market is likely undervaluing the subsidiaries and not ascribing fair value to the  mortgage business and the YONO platform within the bank which deserve to be valued higher
• The Chairman is fairly confident of achieving 1% RoA by FY21. However, he said taking RoA to the close to 2% mark over 5 years would be difficult given that SBI will need to carry out social and financial inclusion objectives more than its private peers.

·      The Chairman categorically denied any potential merger of an NBFC or a private bank into SBI. There is nothing on the cards right now. However he did not deny that the government or the RBI would have a final say in the matter when it comes to merging a weak bank with a strong state bank