State Bank of India results are out and there are a number of critical things to know about it especially if you are investor. Kotak Institutional Equities maintain buy rating on SBI with target of Rs 340. They think SBI reported a 50% YoY earnings growth led by 25% YoY decline in provisions. Gross NPL ratio declined 15 bps QoQ to 5.3% while net NPLs declined 25 bps QoQ to 1.6% of loans. Performance on collections and outlook on restructured loans is similar to large private banks. The retail book should hold up better in this cycle for the bank given the target segment customers are less risky as compared to the corporate NPL cycle.

COMMERCIAL BREAK
SCROLL TO CONTINUE READING

Guidance comforting on asset quality outlook

The management highlighted the following in the call-:

The bank has indicated the pipeline of restructuring loan portfolios is likely to be thin at 1% of loans with current visibility (requests) at Rs 25 bn in retail and Rs 40 bn in the corporate segment, which is insignificant currently. The PCR of 88% on the corporate book indicates that the legacy book has been adequately addressed and the bank does not expect surprises. The bank has taken provisions for slippage that is likely to come in the second half of FY21. The bank has a strong liability franchise, healthy operating profits and leading market share in most of its subsidiaries. Valuations are attractive to retain our positive view. SBI’s lack of recovery in market multiples, unlike what have been seen with private banks which have had similar challenges on the corporate side, is an area of disappointment. The management has given a solid positive outlook but investors want to wait for a few more quarters till they establish comfort on this commentary.

Jefferies says for Q2 FY21, SBI reported profit of Rs 46 bn, up 52% YoY, above their estimate led by lower provision. Loan book grew 6% YoY and better margins (10 bps QoQ) with lower funding cost, supported 15% NII growth. Fee income rose 7%, but treasury gains were down sharply. CASA growth was strong at 15% YoY. Collection efficiency in the domestic book was 97% in Sept; adjusted slippages (for SC standstill & recovery in Oct) at +Rs 110 bn was tad higher.

Jefferies value SBI at Rs 215, as the core banking business stood at 0.6x adjusted P/B, SBI Life at our PT (Rs1,040), SBI Cards at CMP and Asset management business at 30x P/E.

Upside risks:

Improvement in asset quality, higher NIMs, higher than expected loan growth.

Downside risks:

Lower NIM, weaker loan growth, asset quality concerns.

Sharekhan maintains Buy rating on State Bank of India with a price target of Rs 280. State Bank of India’s Q2 FY21 numbers largely met expectations, wherein operational numbers were in-line, but asset quality performance was mixed. Collection efficiency for domestic loans (excluding agri loans) is at an encouraging 97%. However, on a normalised basis, asset quality deteriorated marginally, with GNPA and NNPA ratios increasing by 44 bps and 22 bps, respectively. Asset quality picture appears manageable, PCR of 88.2% is a cushion for investors; legacy assets are well-provided for; margins expected to be stable.

Key Positives:

1) Domestic NIM stood at 3.34%, rising by 12 bps YoY and 10 bps QoQ, as Cost of funds declined and there were no interest reversals.

2) Capital adequacy ratio has increased to 14.72% up 113 bps QoQ.

3) SBI continues to demonstrate a strong liability franchise and savings account balances have increased by 16.28% YoY; CASA stands at 45.39%, up 26 bps YoY and 5 bps QoQ.

Key Negatives:

1) Fresh slippages (on a proforma basis Rs. 14388 cr) came at Rs 17144 cr, from Rs 3637 cr.       

2) Domestic loan book growth was tepid at 6.02% YoY, with only retail segment leading growth at14.55% YoY.

Key Risks:

Risk of further NPAs, especially in the corporate, agri and/or retail segments, due to overall macro economic slowdown and prolonged pandemic recovery would impact growth and profitability.

See Zee Business Live TV Streaming Below:

State Bank of India reported largely in line performance for Q2 FY21, with operational numbers also meeting expectations. However, asset quality performance was mixed. Collection efficiency in domestic loans (excluding agri-loans) as at the end of Q2FY21 stands at 97%. Sanctions and disbursements rose sharply on a y-o-y basis in the quarter for most retail products. Reported asset quality improved QoQ, but deteriorated slightly on a proforma basis. During the quarter, the bank saw reported asset quality improve on a sequential basis, with GNPA / NNPA ratios declining by 16 bps and 27 bps respectively, to 5.28% and 1.59%. However, on a proforma basis, GNPA and NNPA ratios rose by 44 bps and 22 bps, respectively. The bank indicated that the likely total amount of slippages and restructuring at the end of FY21 is at Rs 60000 cr (around 2.5% of gross advances), which is manageable.

Also, the bank stated that only Rs 2000 cr of provisions (5.8% of H1 FY21 PPOP) remain to be taken in for the amount, which is expected to be taken in H2. Hence, for now, asset quality picture appears to be manageable. Also, the bank shared that due to restrictions on contacting clients (in the agriculture segment, etc) it saw slippages rise in the category, which is expected to gradually normalise. Provisioning coverage ratio (PCR) reached at 88.2% from 86.32% in Q1 FY21 and is a cushion for investors. The management’s tone was positive in terms of asset quality, with expectations of recovery and resolution in H2FY21. SBI is likely to benefit from the expected consolidation in the banking sector in terms of customers and liability franchise, which augur well for India’s largest bank. Moreover, its healthy PCR indicates less residual stress from the legacy book.

SBI is better placed as compared to its PSU bank peers (with respect to asset quality, capitalisation, underwriting strength etc) with business strengths (being the largest bank in India), with consistent and reasonable margin cushions. Moreover, high coverage and improving business outlook are positive cushions. Its healthy PCR of 88.19% indicates less residual stress from the legacy book.