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State Bank of India's Q2FY19 results (Outperformer) - Asset quality improves

Q2FY19 results highlights

• SBI reported PAT of Rs9.4bn versus our estimate of a loss because the bank did not make 100% provisioning on Essar given the impending resolution and it earnedRs15bn from stake sales in subsidiaries. Core profitability remained weak though it improved qoq. Core PPOP excluding trading gains and NCLT recoveries grew 10% yoy /11% qoq.
• Slippage declined to Rs109bn from Rs143bn qoq. Corporate and retail slippage declined sharply while there was a sharp increase in SME slippage. Of the total corporate slippage, 72% was from the watch list versus only 42% in 1QFY19. Corporate slippage is at a mulit-year low of Rs33bn versus Rs80bn qoq. The bank sold Rs34bn to an ARC in 2Q. GNPAs declined 3% qoq and now stand at 9.95% of loans. Total stress loans account for 12.8%. PCR excluding technical write-offs stands at 53.9%.
• The residual watch list is Rs204bn/1% of loans of which power is 49%. QoQ, watch list has declined by 9% from Rs204bn to Rs223bn. Total stress loans now stand at12.8% of loans versus 13.6% qoq.
• Loans grew 9% yoy and 4% qoq. Domestic loan growth was 11% yoy while foreign loans declined yoy due to the discontinuation of LoUs. Adjusting for LoUs in foreign loans and Cps/bonds in domestic loans, total loans grew 12.5% yoy. Retail and corporate loans grew 14% yoy while SME grew 5%.
• NIM for 9MFY19 declined 7 bps over 1HFY19 to 2.73%. In 1Q, SBI had booked NCLT recoveries of Rs19bn through the income statement. NII grew 12% yoy but declined 4% qoq.
• The bank booked gains of stake sales in subsidiaries of 1) Rs4.7bn by selling partial stake in SBI General Insurance and 2) Rs10.9bn on transfer of bank’s merchant acquiring business to its wholly owned subsidiary – SBI Payment Services. Ex-trading gains non-interest income grew 8% yoy and 1% qoq. Opex grew 12% yoy/ flat qoq.
• Credit cost fell to 2.2% from 2.6%. The bank did not make 100% provision on Essar Steel though it slipped to D3 in view of the impending resolution.

Valuation and view

While SBI’s core profitability remained weak, it improved sequentially with better loan growth and lower opex. With pick up in core PPOP and likely NCLT recoveries/upgrades in 2H, we maintain Outperformer. We are revising our TP to Rs335 from Rs330 as we increase our value of subsidiaries to Rs97 from Rs83 earlier. We value the core business at 0.9x PBV FY20E. We expect RoE of 10.8% in FY20E which is below the CoE, as such valuation of the core bank will continue to be below book.