ICICI Securities maintains BUY rating on State Bank of India with a target price of Rs 272. State Bank of India's Q2 FY21 matched our expectations with operating metrics suggesting performance sustainability in the near term.

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This gives confidence to revise SBI earning upwards and reaffirm positive stance by virtue of:

1) Collection efficiency (ex-agri) excluding arrears settling at 97% for Q2 FY21 (97.5% for October)
2) Estimated slippages + restructuring at 2.5% of advances, despite slippages (including standstill accounts settling higher at 2.9% - agri segment continued to disappoint)
3) Improved traction in retail credit (15% YoY growth), that too directed towards better rated customer profile or secured assets
4) NIMs further expanded 10bps to 3.34% (after rebounding 30bps in Q1 FY21).

Credit cost was contained at 1.9% (despite accelerated provisioning on proforma slippages and restructuring). Need for a contingency buffer was again not felt though we conservatively estimated the credit cost at 2.1% / 1.5% for FY21E / FY22E. Improving visibility on sustenance of operating profit (>1.5% of assets), unlocking potential in subsidiaries and tempting valuations, more than outweigh near-term risks on equity dilution and negative surprise (if any) in credit costs.

Ambit remains a buyer with a revised target price of Rs 402 from Rs 363 earlier. Ambit says Core operating profit grew 15% YoY driven by 15% YoY NII growth and 1% YoY fee income growth, partially offset by 10% YoY opex growth. CASA growth at 2% QoQ led to 18 bps QoQ decline in cost of funds and 11 bps QoQ NIM expansion. Collection efficiency was 97% in Sep’20 and the bank expects 2.5% gross slippages/restructuring in FY21E.

With clean-up in corporate loan being largely over and most of the retail book being exposed to government/corporate salaried employees, we expect gross slippages to average 2.9% in FY21/22 and average credit cost of 1.7% in FY21/22 (vs 2.3% in FY19/20). Strong position on liquidity with a high retail deposit base should help maintain NIMs and growth. Further, subsidiaries put a cushion on valuation and can provide capital if needed. With operating trends and asset quality trends being in line with large private sector banks, valuation discounts should narrow down.
Robust core operating profit/deposit growth, NIM expands

SBI registered a robust core operating profit growth of 15% YoY in Q2 FY21 (vs growth of 24% YoY in Q1 FY21) driven by strong NII growth of 15% YoY (vs growth of 16% YoY in Q1 FY21), sharp rebound in core fee income with 1% YoY growth partially offset by a high opex growth of 10% YoY.

Where do we go from here?

Though agri / SME loans could pose some challenges, Ambit still expects slippages for SBI to be lower than most private sector peers due to lower exposure to stressed segments. They expect gross slippages to average 2.9% in FY21 / 22 (vs 2.4% in FY19 / 20) leading to average credit cost of 1.7% in FY21 / 22 (vs 2.3% in FY19/20). Moreover, a strong deposit franchise (retail deposit share of 73% as of Q2 FY21) puts the bank on the strong footing in the current environment. Whilst Tier-1 ratio at 12% is relatively lower, stake sell in subsidiaries (total value of Rs 14 bn, 58% of current equity capital of SBI) gives levers to the bank to raise equity by selling stake in subsidiaries without diluting shareholders.

Antique stock broking maintains buy rating with a revised target price of Rs 280 vs Rs 260 earlier. SBIN reported PAT of Rs 45.7 bn was 7% above estimate. Reported NII growth of 15% YoY was 5% above estimate (2% above estimate adjusted for interest income reversals) and helped core PPOP growth of 15% YoY. Reported NIM improved by 11bps QoQ even as liquidity stayed in excess, reported slippages were Rs 30.9 bn, but adjusted for SC order was Rs 175 bn (annualized slippage ratio of 3.3%) of which Rs 90 bn was from agriculture segment and Rs 51 bn from SME.

Management cited that of this Rs 60 bn has already been upgraded in Oct-20 and with collection efficiency of 97% (ex-agriculture loans), highly resilient retail loans and contained corporate stress expects, guided to contain new stress formation to Rs 600 bn which is 2.5% of loans (of which Rs 64 bn is already recognized). High coverage ratio of 88% (including Two) provides cushion on legacy NPLs. Core PPP of 1.3-1.4% is a limitation as of now but SBIN is highly levered to a recovery environment that could drive NIMs higher and credit cost lower, aiding faster normalization of ROAs which we are currently forecasting to be 0.4-0.7% over FY21-23e.

Healthy core performance, modest loan growth and excess liquidity:

NII grew 15% YoY led by margin expansion of 11 bps QoQ / 22bps YoY despite moderating loan growth of 6%YoY and sustained momentum in deposits of 14% YoY which pulled domestic loan to deposit ratio to 61% (multi quarter low). Fees (Rs 58 bn v/s avg 59 bn during Q1 FY20- Q3 FY20) moved to pre-Covid levels driven by transaction fees (+23% QoQ) and loan processing fees (57+% QoQ).

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Loan processing fees is likely to be retail led as:

a) Disbursement in Sept'20 month across major retail products was considerably higher than Sept'19
b) Gross retail loan grew 5% QoQ and 15%YoY.

Bank allocated Rs 16 bn towards wage revisions which kept cost growth at 10% YoY and core PPOP grew 15% YoY. Investment book expanded 8% QoQ and 35%YoY and CASA ratio was steady at 45%