SBI share price: SWOT analysis has this big message for investors | Julius Bear

SBI share price: Julius Bar maintains Buy rating on State Bank of India with target of Rs 305. NII grew 15% yoy to Rs 281.8 bn (Q1: +16% yoy; +6% qoq), led by a 12 bps yoy rise in the domestic NIM to 3.34% and loan growth of 6% yoy. Collection efficiency at 97% (ex agri) was very comforting. Furthermore, management guidance of slippages and restructuring at 2.6% for FY 2021 would alleviate some concerns around asset quality.

Investment Thesis:

Q2 NII for SBI grew 15% yoy on a 12 bps yoy rise in the domestic NIM to 3.34% (+10 bps qoq), while loan growth of 6% yoy was led by retail strength. Non-NII declined, owing mainly to much lower divestment gains, keeping the revenues broadly stable yoy. Lower taxes aided a 52% yoy rise in PAT to Rs 45.7 bn. Moreover, due to an Supreme Court stay order, SBI reported fresh slippages remained low, which, coupled with a higher recovery / upgradation, resulted in an improved asset quality, with the net NPL ratio down 27 bps qoq and the PCR up 187 bps qoq to 88.2%.
Collection efficiency at 97% (ex agri) was very comforting. Furthermore, management guidance of slippages and restructuring at 2.6% for FY 2021 would alleviate some concerns around asset quality.

SBI’s profits over the medium term should benefit from:

(i)  Market share gains
(ii) Strong liquidity (an LCR of 134%+ at end of March 2020)
(iii) Cross-selling
(iv) A strong PCR

Guidance:

SBI expects incremental slippage of Rs 200 bn in H2 FY 2021, taking slippage (Rs 414 bn) and restructuring (Rs 195 bn) book to over Rs 600 bn by end FY 2021. It expects recoveries of Rs 60 bn-Rs 70 bn in H2. 

SWOT ANALYSIS

Strengths:

SBI is a best in class franchise with a dominant domestic market share of over 20%, a wide distribution network, pan-India presence, a superior CASA profile and a strong positioning in digital banking.
High probability of government support, coupled with the status of being a systemically important bank.
Relatively better capitalised than peers, minimising the risks of a potential equity dilution

Weaknesses:

High credit risks, given its significant exposure to stressed sectors and potential slippage from its restructured book.
Elevated credit costs due to the slower resolution of impaired loans and legal / regulatory impediments.
Loan growth has trailed the sector trends in recent years, with the bank focusing on improving the overall quality of its book.

Opportunities:

The merger with its associate banks will bring in cost and operational synergies while monetisation of noncore stakes could boost profits of SBI.
Enhancing cost efficiency through improved branch utilisation, digitalisation initiatives and greater emphasis on cross selling.
Improving macro and rising financial savings, coupled with various government initiatives (‘Make in India’, ‘Housing for all’, ‘Smart Cities’) which should drive credit offtake in the medium term.

Threats:

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Further deterioration in asset quality due to an economic slowdown or delays in reform implementation will hurt the valuations of SBI.
Increasing competition from new / private banks, rise in interest rates and a slower revival in the corporate credit cycle can impact SBI’s growth going forward.
Merger integration related risks.