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MOSL: STATE BANK OF INDIA (Buy)-Asset quality improving-earnings to strengthen over FY20/21

State Bank of India: Asset quality improving; earnings to strengthen over FY20/21

(sbin IN, Mkt Cap USD35.6b, CMP INR284, TP INR340, 20% Upside, Buy)

 

• SBIN reported PAT of INR39.5b (our estimate: INR53.4b) due to lower other income (-14% QoQ) and higher opex (+21% YoY). NII growth was robust at 21% YoY to INR226.9b, driven by strong loan growth (+12% YoY) and expansion in the domestic NIM (+17bp QoQ to 2.97%).
• Other income declined 14% QoQ to INR80.3b, mainly due to lower treasury gains (-59% YoY to INR4.2b) and core fee income (-5% YoY). Opex grew 21% YoY to INR181b, mainly due to (i) pension provisions (INR15b), (ii) INR9b on account of gratuity and (iii) wage provisions of ~INR9b. Employee expenses, thus, increased ~31% YoY to INR111.8b. Core PPoP grew at a tepid 6% YoY (7% miss).
• Provisions declined 68% YoY, mainly due to write-backs on treasury portfolio (INR79.9b), while provisions toward NPAs increased 37% QoQ to INR139.7b, as SBIN further improved its coverage ratio to 74.6% (2QFY19: 70.7%). The bank expects provision write-backs of INR60b on resolutions (largely on account of Essar Steel resolution and a few power accounts).
• Retail loan growth was robust at 18%/6% YoY/QoQ, led by home loans (+26.5% YoY; INR110b of buyouts), while corporate segment grew by 21% YoY. Exposure toward power, roads and ports increased but was led by PSUs.
• Gross slippages moderated to INR65.4b (fresh slippages at 45.2b), as corporate slippages declined to INR13b. Retail slippages were also lower at INR4.9b. Improved recoveries and higher write-offs drove an 8.8%/14.6% QoQ decline in GNPLs/NNPLs. GNPL ratio, thus, declined 124bp QoQ to 8.71%, while the net NPL ratio declined 89bp QoQ to 3.95%.
• Other highlights: (a) O/s SMA-1 & 2 exposure stood at INR170b, of which INR93b was towards corporate SMA-1&2. (b) ~38% of standard power exposure is toward private, while SMA-1&2 accounts in the power sector stand at INR61b; NPA in the power sector is INR314b and has provision coverage of 50%. (c) SBIN has total 75% PCR on NCLT accounts. (d) SBIN guided for INR250-300b slippages for FY20.