SBI share price rises 6 pct, HDFC Sec reveals growth booster shot reason, says stock is a buy

HDFC Securities maintains buy rating on SBI with target of Rs 317. SBI’s Q2 earnings were ahead of estimates, led by lower-than-expected provisions. The bank reported a sharp improvement in collection efficiency to 97% in Q2. These have been common themes across most banks this quarter. While HDFC Securities have reduced their slippage and provisioning estimates, they remain conservative. They believe it will be prudent for State Bank of India to raise equity capital. SBI has one of the strongest deposit franchises; this, along with inexpensive valuations, drives our BUY rating. 
 
Key Highlights:

Asset quality and collections adjusted for the impact of the SC order, GNPAs and slippages would have been 5.98% (+44 bps QoQ) and 3.04%. SBI reported a sharp improvement in collection efficiency to 97% (excluding agri loans) in Q2 FY21. The bank’s performance on this front is similar to that of several private banks with better asset quality track records. The bank expects Rs 414 bn of slippages (83% of FY20 levels) and Rs 195 bn of restructuring (85bps) in FY21E. Even as HDFC Securities have reduced our FY21E slippage estimates to 2.8%, they remain conservative.

Provisions fell to Rs 101.2 bn, led by a sharp fall in NPA provisions to Rs 56.2 bn. The bank held Covid-19 related provisions of Rs 70.9 bn (31 bps of loans) including Rs 6.5 bn and Rs 31.9 bn towards restructuring applications received and accounts that would have slipped in Q2 FY21 respectively. In terms of the proportion of Covid-19 related provisioning, SBI ranks much below several large private sector banks. While we have reduced our credit costs estimates, in tandem with our GNPA estimates, to 1.6% over FY21-23E.

YoY deposit growth was strong at 14.4% and was led by CASA growth of 15.1%. SBI remains one of the best placed banks in terms of deposit traction. The bank raised Rs 199 bn. HDFC Securities continue to believe that it will be prudent for SBI to strengthen needs to raise equity capital, especially if credit growth picks up meaningfully.

Key trends in Q2 FY21:

1. Credit growth in Retail is coming back to pre Covid-19 levels. Sanctions and Disbursements during Q2 FY21 are significantly higher YoY across most retail products
2. Asset Quality outcomes are better than prior expectations. The Collection efficiency in domestic loan books (excluding Agri Segment) at the end of Q2 FY21 stood at 97%.
3. The Bank continues to demonstrate a strong liability franchise driven by brand, trust and reach. Savings account balances have increased by 16.28% YoY; SBI now has a total deposit base at Rs 34.7 lakh crores as at the end of Q2 FY21.
4. Domestic NIM for the quarter at 3.34% has increased by 12 bps YoY and 10 bps QoQ. There is sufficient liquidity (credit deposit ratio at a low of 61.27%) to fund credit growth which
5. Bank has raised Rs 19931 cr
6. Digital customer on boarding 38% of retail asset accounts and 60% of liability customers on boarding done through digital channels in H1 FY21.

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Q2 FY21 result highlights:

Bank has delivered a strong performance in Q2 FY21 with all round improvement in Profitability, Capital Adequacy and Provision Coverage Ratio, including Additional Provision over Minimum Regulatory Provisions required.
Bank registered a Net Profit of Rs 4574 cr in Q2 FY21, an increase of 51.88% over Q2 FY20.
Operating Profit (Excluding Exceptional Items) increased to Rs 16460 cr in Q2 FY21 from Rs 14714 cr in Q2 FY20, an increase of 11.86% YoY.
Net Interest Income of the Bank grew by 14.56% YoY during Q2 FY21.
Domestic Net Interest Margin (NIM) improved to 3.34% in Q2 FY21, registering an increase of 12 bps YoY.
Non-Interest Income (Excluding one-off Items) remained flat with Q2 FY21 at Rs 8528 cr as against Rs 8538 cr in Q2 FY20.
Total Deposits grew at 14.41% YoY, out of which Current Account Deposit grew by 8.55% YoY, while Saving Bank Deposits grew by 16.28% YoY.
Credit Growth stood at 6.02% YoY, mainly driven by Retail (Personal) Advances (14.55% YoY), Agri Advances (4.19% YoY) and Corporate Advances (2.82% YoY).
With the YoY growth in Corporate Bonds / CPs at Rs 54980 cr taken together, the loan book has grown by 7.97% YoY.
Home loan, which constitutes 23% of the Bank's domestic advances, has grown by 10.34% YoY.
Net NPA ratio at 1.59% is down 120 bps YoY and 27 bps QoQ. Gross NPA ratio at 5.28% is down 191 bps YoY and 16 bps QoQ.
Provision Coverage Ratio (PCR) has improved to 88.19%, up 696 bps YoY and 187 bps QoQ.  
Slippages Ratio for Q2 FY21 has declined to 0.46% from 1.57% as at the end of Q2FY20.
Credit Cost as at the end of Q2 FY21 has declined 103 bps YoY to 0.94%.
Cost to Income Ratio has improved from 53.47% in H1 FY20 to 52.61% in H1 FY21, an improvement of 86 bps.
Capital Adequacy Ratio (CAR) has improved by 113 bps YoY to 14.72% as of Sep 2020.
Return on Assets (RoA) increased by 14 bps YoY to 0.43% in H1 FY21 against 0.29% in H1 FY20.
Share of Alternate Channels in total transactions has increased from 90% in H1 FY20 to 93% in H1 FY21.