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State Bank of India's Q1FY20 results (Outperformer) - Sharp deterioration inasset quality

Q1FY20 results highlights

• SBI’s PAT of Rs23bn increased 176% qoq but was lower than our estimate of 26bn. The result was below expectations on many counts 1) Slippage more than doubled to Rs169bn from 80bn qoq 2) NII was lower than expected due to interest reversals on agri loans 3) Benefit of gratuity was eaten up by higher pension provisions 4) YoY growth in fee income was soft. 5) The new watch list at Rs357bn is significantly higher qoq. 6) Management did not sound confident that the DHFL deal will happen soon given the large number of stakeholders.
• Slippage more than doubled to 169bn from 80bn qoq. There was a sharp rise in corporate, agri and SME slippage. Corporate slippage rose from 28 to 62bn as Ratnagiri Power of 20bn slipped. Agri slippage rose sharply from Rs26 to Rs42bn. Rs20bn of incremental agri slippage came from Maharashtra as the waiver scheme continues to be extended given forthcoming state elections. Management believes it will be tough to recover these agri NPLs. SME NPLs also rose sharply from Rs21bn to Rs40bn as Rs11bn of loans as agri loans of Rs11bn came out of dispensation. Total Mudra loans stand at Rs360bn of which Rs35bn are NPLs. While slippage was high, GNPAs declined 2% qoq as write-offs were also high. GNPA ratio remained unchanged qoq at 7.53%  while PCR ex technical write-offs declined to 61% from 62%. Credit cost declined to 2.2% from 3.3% qoq but remained higher than management guidance.
• The total fund-based watch list now stands at Rs270 bn which includes Rs80bn of SMA accounts below Rs20bn and Rs191bn of accounts above Rs20bn where SBI has signed inter-creditor agreements for potential resolutions. The additional non-fund exposure for this pool is Rs4bn. In addition, there is non-fund exposure associated with NPLs of 87bn. The watch list including non-fund stands at RsRs360bn. The larger stress loans are DHFL at Rs100bn and Suzlon at Rs40bn.
• Loans grew 14% yoy but declined 2% qoq. Corporate loans grew 12% while retail 19%.There was a sharp rise in telecom loans due a structured transaction with RJio and Rs30bn of loan to BSNL. Deposit growth remained soft at 8%, however given SBI’s lower- than-sector CD ratio of 72% that is not a concern. CASA grew 7% while the CASA ratio remained stable at 45%.  NII growth was weak and below expectations at 5% yoy (flat qoq) as the bank reversed interest of Rs28bn for 3 years on agri NPLs. Domestic NIM improved 6 bps qoq to 3.01%.
• YoY fee growth was soft at 5%. Total non-interest income grew 20% yoy but declined 37% qoq. MTM write back declined qoq as the gross write back was offset by investment depreciation of Rs12bn on DHFL bonds. Core PPOP grew 32% yoy on a low base while unadjusted PPOP grew 11%.

Valuation and view

With a weak 1Q, the bullish guidance that mgmt. gave in 4Q19 for FY20 of net credit cost and gross slippage of 1% and core RoA of 0.7% already look unachievable. Mgmt has revised guidance of core RoA to 0.5%-.6% from 0.6-0.7% and credit cost to 1.4% from 1% earlier. We cut earnings and TP to Rs365. We see downside risks to earnings from a weak macro, high pension costs and a larger watch list. We maintain Outperform due to inexpensive valuations but asset quality remains the key monitorable.