FREE

State Bank of India's Q3FY20 results (Outperformer) - High profit driven by recoveries, but slippage rises

Q3FY20 results highlights

• SBI’s PAT of Rs55.8bn grew 41% yoy and 85% qoq. The bank booked NPL recovery income of Rs118bn from Essar Steel / Ruchi Soya and made a net DTA write down of Rs13bn. Of the total NCLT resolution income, Rs40bn was booked through NII and Rs78bn through provisions. Core PPOP ex one-offs grew 11% yoy / declined 4% qoq while total PPOP grew 44%yoy.
• Slippage rose sharply from Rs91bn to Rs201bn qoq. Corporate slippage including addition to existing accounts rose from Rs36bn to Rs112bn driven by DHFL of Rs70bn and Suzlon of Rs25bn. Of the total DHFL loan exposure of Rs70bn, Rs55bn was domestic and Rs15bn was international. The bank carries a total provision of 29% on the total DHFL exposure of Rs100bn (20% PCR on Rs71bn of loans and 50% MTM charge on Rs29bn of bonds). Retail slippage remained broadly stable at Rs54bn versus Rs52bn. While slippage rose sharply, recoveries were also high at Rs135bn versus Rs39bn qoq led by Essar and Ruchi Soya. GNPAs declined 1.2% qoq to 6.9% of loans. PCR ex TWO improved to 63.5% versus 62.9%.
• The total fund-based watch list / SMA now stands at Rs81bn versus Rs182bn in 2Q – the sharp reduction is driven by regularization of accounts worth Rs69bn and slippage of a few accounts into NPLs. Non fund exposure associated with NPLs is 10% and that associated with the watch list is 12%. Total fund +non fund watchlist and SRs amount to Rs327bn. Voda is not part of the watchlist (SMA pool) though it is part of the BBB book. The bank has provided 97% on RCOM and believes that the write back from the RCOM resolution will be sufficient to take care of contingency provisions on Vodafone.
• Loans grew 7% yoy/ 2% qoq. Domestic corporate loan growth remained flat yoy while retail loans grew strongly at 18% yoy and international loans at 17% yoy. CASA grew 8% yoy while the CASA ratio declined qoq from 45.1% to 44.7%. Domestic NIM ex one-offs was stable qoq. Unadjusted NIM expanded 37bps qoq to 3.59%. Unadjusted NII grew 22% yoy/13% qoq. Ex one-offs core NII grew 5% yoy and declined 3% qoq
• Fee growth accelerated to 19% yoy / 12% qoq driven by higher corporate sanctions. Total non-interest income grew 13% yoy but declined 24% qoq. Opex growth was contained at 3% yoy. Gross credit cost rose to 2.8% from 2% qoq while net of recoveries credit cost fell to 1.5% from 2% qoq.
• The bank moved to the new tax regime. It marked down DTA by Rs28bn and MAT of Rs5bn. This charge of Rs33bn was offset by a tax write back of Rs10bn relating to excess provisions under the higher, old tax rate for 1HFY20. The net charge on account of moving to the new tax regime was Rs13bn.

Valuation and view

We maintain Outperformer due to inexpensive valuation and strong performance of subsidiaries. Listing of SBI Cards and resolution of a few power accounts will likely serve as positive triggers in the near term. However volatility in corporate asset quality in a weak macro and the risk of regulatory directives would be the key overhang. As for earnings, we believe NIMs and recovery income have peaked. As such loan growth and decline in credit cost would be the key drivers from hereon. We revise TP to Rs350 from Rs330.Key guidance: 1) PPOP of Rs70bn plus in FY20. 2) Provisioning of Rs100bn in 4QFY20 3) PPOP of Rs65bn in FY21. 4) Slippage of Rs350bn in FY21.