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State Bank of India's Q2FY20 results (Outperformer) - A strong quarter but corporate stress can resurface

Q2FY20 results highlights

• SBI reported PAT of Rs30bn, better than our estimate of Rs26bn. PAT grew 219% yoy and 30% qoq. The bank has not yet shifted to the new tax regime. Had it shifted to the new tax regime, profit would have been lower by 30bn due to the mark down of DTA of Rs100bn as of end-March 2019. The bank also booked one-time gain of Rs35bn from stake sale in life insurance which was utilized towards 9bn provision towards its loan exposure to DHFL (20% PCR) and Rs26bn or 100% provision towards its exposure to Suzlon SBLCs. 21bps qoq domestic NIM expansion and a sharp decline in slippages were key positives.
• Slippage fell sharply from Rs170bn to Rs91bn qoq. Of the total slippage, corporate slippage (including increase in existing NPLs plus overseas slippage) was Rs39bn versus Rs62bn qoq while retail/agri/SME slippage was Rs52bn versus Rs105bn qoq. The key account that slipped was domestic Suzlon for Rs10bn. The SBLCs that the bank has given towards overseas loans of Suzlon of Rs26bn are still treated as standard though the bank has fully provided towards these in 2Q. Agri slippage eased from Rs42bn to 30bn qoq as 1Q has waiver-related slippage from Maharashtra. SME slippage fell sharply from Rs40bn to Rs15bn but the bank also restructured SME loans of Rs20bn. With lower slippage, GNPAs declined 4% qoq to 7.19%. Specific credit cost declined 5% qoq. However the bank provided Rs9bn towards their loan exposure to DHFL which is included in standard provisions and Rs 26bn towards Suzlon SBLCs which is part of other provisions.
• The total fund-based watch list now stands at Rs261bn (294bn in 1Q) which includes Rs93bn of SMA accounts below Rs20bn and Rs168bn 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 85bn. The watch list including non-fund stands at RsRs350bn against 362bn qoq. The larger stress loans are DHFL at Rs99bn and Suzlon SBLCs at Rs26bn.
• Loans grew 10% yoy / flat qoq. Domestic corporate loan growth decelerated to 3% yoy while retail loans grew strongly at 19% and international loans at 10%. It may be noted that while growth in overall corporate loans was subdued, there was huge growth in sensitive sectors that are going through a downturn – power (10% yoy), roads (29% yoy), HFCs (24% yoy), other NBFCs (5%) and telecom (39% yoy). While growth in telecom is driven by safer loans (to RJio and BSNL), growth in loans to HFCs and SEBs is concerning.  CASA grew 8% while the CASA ratio remained stable at 45%.  Domestic NIM expanded 21bps qoq to 3.22% led by higher average MCLR and cut in deposit rates. NII growth was strong at 18% yoy / 7% qoq.
• YoY fee growth was flat.  Total non-interest income grew 28% yoy and 50% qoq as the bank booked profit on stake sale in life insurance of Rs35bn. Wage expenses rose 17% yoy driven by a rise of 44% yoy / 10% qoq in actuarial provisions due to falling yields.  PPOP grew 32% yoy / 37% qoq while core PPOP grew 12% yoy / 10% qoq. 

Valuation and view

While 2Q was strong with low slippage, we expect corporate asset quality to remain volatile in the quarters ahead given the weak corporate environment. We expect the run-rate of corporate slippage to be higher in 2H compared to 2Q. Also credit cost would be lumpy in 2H if DHFL is classified as a fraud account following KPMG’s negative forensic audit report. We maintain Outperformer due to inexpensive valuation and strong performance of subsidiaries. Listing of SBI Cards and resolution of Essar Steel and a few power accounts will likely serve as positive triggers. However volatility in corporate asset quality from accounts like DHFL and Vodafone Idea is the key monitorable.