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MOSL: STATE BANK OF INDIA (Buy)-Asset quality challenges not fully over-Higher provisions drive earnings cut

STATE BANK OF INDIA: Asset quality challenges not fully over; Higher provisions drive earnings cut

(SBIN IN, Mkt Cap USD39.6b, CMP INR308, TP INR380, 23% Upside, Buy)

 

• SBIN reported tepid PAT of INR23.1b due to higher provisions of INR91.8b and muted treasury gains. NII grew 5% YoY (flat QoQ) to INR229.4b (affected by interest reversals of INR27.9b). Domestic NIM was flat QoQ at 3.0%.
• Other income increased 20% YoY to INR80.1b. Treasury gains were muted at INR4.8b. Opex growth moderated to 7% YoY (at INR177b), though the bank made pension provisions of ~INR40b on account of a decline in bond yields.
• Loan growth was at 14% YoY (-2% QoQ), driven by retail loans (+19% YoY), while the corporate book grew 12% YoY (-8% QoQ). Deposit base increased 7% YoY, with the CASA mix at 45.1% (45.7% in FY19).
• Fresh slippages increased to INR162.1b; however, higher write-offs of INR154.8b facilitated a 2.5% QoQ decline in GNPLs. The slippages trend remains elevated across segments, with corporate slippages at INR53.5b (of which one account of INR20b slipped due to a delay in signing of ICA), SME slippages at INR39.6b and agri slippages at INR42.4b. Provision coverage ratio was stable at 61% (79.3% including TWO). SBIN made additional provisions of INR23b toward two standard stressed accounts (HFC and renewable energy).
• Analyst meet: (a) Two standard stressed accounts undergoing resolutions constitute ~INR140b (70% of standard stressed accounts). (b) Total stressed pool stands at INR270b.
• Valuation view: After reporting a benign slippage rate over the past few quarters, SBIN has again reported an increase in slippage trajectory, reflecting the deterioration in the underlying lending environment. The bank has lowered its guidance on core RoA to ~0.6% (excluding NCLT write-backs) and increased the credit cost guidance to 1.4% for FY20. We cut our FY20/21 earnings estimates by 14%/11% to factor in higher credit cost/slippages. The bank's core operating profitability is likely to improve, led by expansion in margins and cost control, which will help mitigate some credit cost pressures. We, thus, revise our target price to INR380 (1.2x FY21E ABV). Maintain Buy.