SBI’s asset quality surprises positively, UBS maintains buy rating with target of Rs 430

UBS says SBI’s Asset quality surprises positively and the bank's operating metrics is stable. SBI's Q3 FY21 earnings of Rs 52 bn were above UBS estimates (Rs 48.8 bn) led by stable NM (3.1%) and lower provisions despite higher employee expenses and lower than expected core non- interest income growth (-1.5%YoY). Core PPOP declined by 6.7% YoY. Proforma GNPL/ NNPL (adjusted for SC order) were at 5.4/ 1.8% (5.9/2.1% in Q2) and proforma net NPL addition in Q3 were at Rs 20.7 bn (Rs 165 bn in 9M FY21 i.e. 0.7% of loans). Restructured loans (including requests received) were at 0.8% of total loans and management maintained its guidance of Rs 600bn (2.5% of loans) of new stressed assets in FY21. Share price of SBI closed at Rs 393 on Friday, up Rs 3 or (0.7%).

Asset quality trends for SBI in 9M of FY21 seem better than most private sector banks due to relatively low share of retail unsecured exposures. However, SBI provision buffer for FY22 is almost nil vs 1.0/1.2% for Axis Bank / ICICI Bank as per our calculations and therefore we keep provisions at 150bps in FY22. On revised earnings, UBS expects 10% ROE in FY22 with upside risks if economic growth surprises positively. UBS believes the current valuation prices in all negatives. UBS maintains Buy and increases price target to Rs 430.

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UBS highlights how SBI Q3 results fared vs expectations:

SBI’s Loan growth of 7.6% YoY was higher than estimates and led by 15.5% growth in retail loans while agri/ corporate loan growth was slower at 1.7/2.2% YoY. SME loans grew by 5.6% YoY was primarily due to lending of Rs230bn under ECLGS scheme. Employee expenses were higher in Q3 due to one- time wage settlement. Restructured loans (0.8/ % of loans) is within the earlier guidance of Rs200bn of restructuring expectation and is led by corporate loans (2/3), and retail (mostly housing). SMA 1&2 loans (30-90days overdue and adj. for restructuring and proforma slippage) were at 0.6% of total loan.

SBI’s Management is confident but guidance unchanged: UBS raise FY21/22 earnings by 27/34%

SBI’s Management didn’t change its total stress loan guidance of 2.5% of loans for FY21. UBS increased loan growth for FY21/22 by 100bp each to 6/8% and NIM by 4/9bp to 2.9/2.9%. UBS have also reduced credit cost for FY21/22 to 1.7/1.5%. UBS increased earnings for FY21/22 by 27/34% and expects SBI's ROE to improve to 9/10% in FY21/22.

UBS says Valuation rerating to continue in SBI:

UBS increases price target to Rs 430, maintains Buy rating on SBI. UBS increased their SOTP based price target from Rs 360 to Rs 430 due to earnings upgrade. UBS values the banking business at Rs 290 (1.0x FY22E PBV) and Rs 140 or subsidiaries.