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State Bank of India's Q4FY19 results (Outperformer) - All hits taken upfront, FY20 starts on a clean slate

• SBI’s PAT of Rs8.3bn declined 79% qoq and was substantially below our estimate of Rs39bn. While provisions were higher than expected as the bank provided 100% for Essar/Bhushan/Alok, these were partly offset by MTM and tax write-backs. Asset quality improved materially with GNPAs declining 9% qoq. Acceleration in loan growth, stable qoq NIMs, improving asset quality, a substantial reduction in the SMA pool, 1% RoA on overseas operations and good performance of subsidiaries were the key positives. Weak core fee growth of 2% yoy and low deposit growth were the negatives. While deposit growth remains low at 8% yoy, SBI’s CD ratio of 71% offers good comfort giving it leeway to grow loans faster than deposits. With conservative provisioning for loan losses and wages, most lumpy charges have been taken care of in FY19.
• GNPAs declined 9% qoq due to slippage remaining under control and higher write-offs while recoveries remained low with no lumpy resolutions. Slippage of Rs79.6bn was in line and included Jet of Rs12bn. GNPAs now stand at 7.5% versus 8.7% qoq. PCR ex technical write offs rose from 57% to 62%. Credit cost rose sharply from 3 to 3.3% qoq because the bank made provisions of Rs108bn (65% of total credit cost in 4q) on Essar Steel, Bhushan Power and Alok Industries taking the PCR on these accounts to 100%. `
• The SMA pool which has been the key source of slippage had come down substantially from Rs170bn to Rs77.6bn. The decline is driven largely by the regularization of Lalitpur Power (45bn) and a few South based accounts. While the SMA pool is small at 0.3% of loans and augurs well for future asset quality, the BB book is still large. The bank gave a very rough indication of the BB book being 4.3% of total loans which is higher than ICBK/AXIS. However, SBI’s exposure to the new stress accounts remains much lower than other banks. Exposure to ADAG is low, to Essel Infra  it is not material while Jet is already an NPL. The only two stressed exposures are Suzlon (52bn)  and DHFL (110bn).
• Loans grew 13% yoy and 6% qoq. Corporate loans grew 15% yoy and 10% qoq while retail loans grew 19% yoy and 6% qoq. Total portfolio purchases in FY19 were Rs190bn of which pools bought from Dewan were Rs30bn.
• NIM remained stable qoq at 2.78% in 4Q19. NII grew 15% yoy and 1% qoq. Fees grew 2% yoy and 82% qoq, the sequential growth is seasonal. Cost/income fell to 52.5% from 58.9%. In FY19 SBI made wage provisions of Rs60bn including gratuity provisions of 21bn which will not recur and wage hike provisions of Rs38bn which will fall to Rs19bn. Core PPOP grew 10% yoy /34% qoq.

Valuation and view

With adequate provisions, likely downside to wage cost and recovery from NCLT accounts, SBI’s earnings and profitability could scale up substantially in FY20/21. Mgmt was upbeat on profitability and asset quality and confident of 1% RoA by FY20. With credit quality concerns behind us and acceleration in earnings growth we reiterate Outperformer and raise our TP to Rs385.