SBI is a preferred recovery play in India and we maintain our Buy rating with a revised price target of Rs 480 (Rs 340 earlier) based on 1.2x Dec-22 adjusted PB
SBI’s 3QFY21 profit of Rs52bn (-7% YoY) was ahead of estimates, led by lower credit costs. Key positive was lower slippages (pro forma, not annualised at 0.8% for 2Q-3Q) that were lower than peers, manageable restructuring of 0.8% of loans & collections of 97%. PPOP was a tad lower due to higher staff costs, but provision beat covered for this. Better asset quality drives our sharp earnings upgrade and we also raise our PT to Rs 480 (from Rs 340). Maintain Buy.
Strong performance on asset quality: Asset quality has held up well in 3Q with 97% collection efficiency. Reported proforma slippages of 0.4% of loans in 3QFY21 was below our expectations and even adjusted for high proforma NPLs in 2Q it would be 0.8%, which is lower than private banks’ 1.1-1.2%. In our view this reflects lower share of retail and unsecured lending at SBI, which on the other hand led the proforma slippages for most private banks. Moreover, restructuring is limited to 0.8% of loans and collection efficiency is stable at 97%. Bank has disbursed Rs230bn (1% of loans) under ECLG scheme to MSMEs. SBI carries relatively lower contingent provision buffer at 0.3% of loans, that offers lower cushion than pvt bank peers. We now see gross slippages at 1.9-2.0% of loans over FY22/23E and credit costs at 1.4% — these drive upgrades to our earnings forecasts.
Strong deposit franchise will aid growth. SBI benefits from a strong deposit franchise that will support market share gains, based on its low funding costs. During 3Q, its Casa deposits grew by 15% YOY with Casa ratio at 45% of deposits. Lower funding costs help to offer lower lending rates vs. even the larger private banks — this can help gain share in the better quality corporate loans.
Slight miss on op. profit led by higher employee costs. NII grew 4% YoY with loan growth tracking slightly above system loan growth at 7% YoY, mainly led by strong growth in retail (15% YoY).
Raise earnings & price target; maintain Buy. On the back of lower credit costs, we raise FY22-23 earnings forecasts by +30% and expect SBI to achieve ROE of 11%. SBI is a preferred recovery play in India and we maintain our Buy rating with a revised price target of Rs 480 (Rs 340 earlier) based on 1.2x Dec-22 adjusted PB.