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State Bank of India (SBIN) Summary

Core Content

This report provides an analysis of the financial performance and outlook for State Bank of India (SBIN) for the first quarter of 2019 (1Q19) and future fiscal years (FY19 to FY21). It outlines the bank's challenges, including a significant loss, elevated credit costs, and weak loan growth, while also highlighting improvements in asset quality and net interest margins (NIMs). The report concludes with a HOLD recommendation and a price target of INR 275.

Main Points

• Financial Performance in 1Q19:

  • SBIN reported a loss of INR 48.8 billion, worse than the estimated INR 22 billion.
  • Provisions rose due to treasury and employee wage revisions, totaling INR 98 billion (35% of net income).
  • NIM expanded by 30 basis points (bps) to 2.8%, driven by lower cost of funds and recoveries in NPLs.
  • Net interest income increased by 9.1% YoY to INR 217,984 million.

• Asset Quality:

  • Gross NPLs declined slightly to 10.7% from 10.9%, while net NPLs dropped to 5.3%.
  • Watch-list loans fell to INR 223 billion (1.1% of loans) from INR 256 billion (1.3% of loans).
  • However, slippages in retail and farm loans (74% of total slippages) remain a concern, especially with farm NPLs rising to 11.6% due to loan waivers in Maharashtra and Karnataka.

• Loan Growth:

  • Loan growth was weak at 4% YoY, much below the industry average of 12.4% YoY.
  • Corporate loan growth was particularly sluggish at 5.1% YoY.
  • Retail and SME loans showed some strength, with retail credit growing 14.1% YoY and SME NPLs remaining stable.

• Deposit Growth:

  • Deposits grew by 5.6% YoY, led by CASA (Current Account and Savings Account) deposits.
  • Savings deposits saw a strong 9% YoY growth, while current deposits declined slightly.

• Valuation and Price Target:

  • The SOTP (Sum of the Parts) valuation-based price target is INR 275, with a 7% discount from the current share price.
  • The bank's book value (BV) is expected to rise to INR 279 by FY21, with a forecasted ROAE of 13.8%.

• Challenges and Outlook:

  • Credit cost is expected to remain elevated at 2% in FY19 and normalize to 1% by FY21.
  • Weak asset quality and low loan growth are key challenges.
  • The report suggests that SBIN may lack near-term triggers for a price increase and recommends holding the stock.

Key Information

• Price Drivers:

  • Historical share price performance has been mixed, with a notable decline in FY14 and subsequent recovery in FY15.
  • The Central Government's recapitalisation plan for public sector banks had a positive impact on stock prices.

• Swing Factors:

  • Upside:
    • Faster recovery in corporate NPLs.
    • Increased loan demand from SME and corporate sectors.
    • Higher gains from the sale of stakes in key subsidiaries.
  • Downside:
    • Delayed resolution of NPLs.
    • Potential listing delays for subsidiaries.
    • Increased competition from new banks, which could impact NIMs.

• Valuation Table:

  • SOTP-based Valuation:
    • SBI (Parent): 1x FY20 adjusted P/BV → Value per share: INR 192 → Contribution to TP: 75%
    • Non-Bank Subs/Associates: Value per share: INR 64 → Contribution to TP: 25%
    • SBI Life: 3x Embedded value → Value per share: INR 46 → Contribution to TP: 18%
    • SBI MF: 5% of AUM → Value per share: INR 7 → Contribution to TP: 3%
    • Other subsidiaries: Value per share: INR 12 → Contribution to TP: 5%
    • Total: INR 257 → Contribution to TP: 100%

• Financial Metrics:

  • Loans are expected to grow at a 10% CAGR from FY19 to FY21.
  • NIMs are projected to remain flat in the range of 2.7–2.8%.
  • The cost-income ratio is expected to remain elevated at 53–55%.
  • ROE is forecasted to improve from a loss in FY18 to 12.0% in FY20 and 13.8% in FY21.

Summary Table

Conclusion

SBIN faces challenges in credit cost and loan growth, but shows signs of improvement in asset quality and NIMs. The report recommends maintaining a HOLD position due to the lack of near-term catalysts. The bank's valuation is based on SOTP, with a price target of INR 275. Despite the challenges, the long-term outlook is cautiously optimistic, with projections of improved profitability and asset quality.