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State Bank of India's Q3FY19 results (Outperformer) - Profitability and asset quality improve

Q3FY19 results highlights

• SBI’s PAT of Rs40bn grew 320% qoq. PAT was below our estimate due to higher provisions. Earnings were strong with acceleration in loan growth, higher NIMs and a substantial reduction in slippage.
• Slippage declined substantially to Rs65bn from Rs109bn. Fresh corporate slippage of Rs13bn was at a multi-quarter low. Of the total corporate slippage, 89%/Rs11.5bn was outside the watch list of which, IL&FS was the major slippage. Rs9bn of IL&FS Hold cos slipped in 3Q for which the bank made 50% provisions. GNPAs declcined 6% qoq to 8.71%. Retail slippage declined materially from Rs75bn to Rs32bn qoq
• Mgmt explained that the SMA pool is the key source of slippage. SMA1+2 for accounts above Rs50M was Rs171bn of which corporate SMA was Rs93bn. The watch list that is not SMA stands at Rs140bn. Watchlist + corporate SMA now stands at Rs233bn or 1.1% of loans. .
• Loans grew 12% yoy and 5% qoq. Corporate loans grew 21% yoy and 3% qoq while retail loans grew 17% yoy and 6% qoq. The bank bought home loan portfolios of Rs87bn in 3Q (of which DHFL was Rs18bn) and it also bought MFI portfolios of Rs25bn which contributed to retail growth.
• NIM for 9MFY19 improved 3bps over 1HFY19. NII grew 21% yoy and 9% qoq. The bank booked NPL recovery income through NII from KSK Oil but the amount was small at Rs3bn.
• The bank booked total treasury income including write-backs of Rs84bn. On the flip side, decline in bond yields increased actuarial provisions by Rs15bn. Core fees declined 6% yoy and 5% qoq pulled down by lower account maintenance charges. Growth in loan processing fee and cross sell remained strong.
• Credit cost rose 37% qoq to 2.4% from 2.2% as the bank made accelerated provisions of Rs50bn on NPls. PCR ex write-offs improved to 57% from 54% qoq. Opex growth of 21% yoy and 11% qoq was higher than expected due to higher actuarial provisions of Rs15bn on account of fall in yields. Core PPOP grew 11% yoy but declined 5% qoq.

Valuation and view

With accelerated provisions and improving loan growth we believe SBI’s earnings are on the recovery path. We forecast RoA of 0.6% in FY20E versus 0.19% in FY19E. Mgmt. guides to slippage of less than 1.5% (Rs300bn) in FY20E and a reduction in credit cost. With credit quality concerns behind us and acceleration in growth we reiterate OP and our TP of Rs335. Loans to DHFL stand at tRs80bn and NCDs/CPs at Rs30bn.