State Bank Of India

SBI has significantly improved its balance sheet strength and has emerged stronger after the corporate NPL cycle and Covid crisis, driven by the reduction in impaired loans, higher coverage on bad loans, better underwriting standards, increasing share of higher-rated loans in the corporate segment, and improving retail mix – thus, it stands to benefit from favourable sector tailwinds. We see an upside risk to SBI’s earnings, led by sustained healthy loan growth, margin improvement (loan repricing and improving retail mix), lower slippages, reduced credit costs, and healthy recoveries. This should drive strong earnings compounding over the medium term and improved return profile. Hence, we expect further rerating in the stock.
* Upside risk to margins persists: Out of the total advances, 75% are floating loans – 41% are linked to MCLR and 34% are linked to other EBLR. We believe there is an upside risk to margins, as transmission of MCLR rates (~100 bps) in corporate loans is yet to happen, which provides sufficient headroom for NIM expansion, thus offsetting any increase in the cost of deposits. The bank reported a strong LCR of ~138% and a lower CD ratio of ~70% in Q2FY2023 and thus bank has been exhibiting its pricing power in terms of pricing of deposits as it has increased retail TD rates only by ~80 bps, while a majority of the hike is passed on to bulk deposits, which have a lower share. The bank is also witnessing an acceleration in loan growth (+20.8% y-o-y, 4.8% q-o-q) in Q2FY2023, led by the retail segment (+19% y-o-y, 4% q-o-q) and revival in the corporate segment. New term-loan disbursements in the corporate segment with higher maturity are being disbursed at higher rates. Even in international loans, margins in the trade finance book have improved, while spreads are higher in syndicate loans. Margin is likely to see an upward bias in the coming quarters.
* Loan growth momentum expected to sustain: Strong growth momentum in advances is expected to sustain, led by robust retail loan growth (homes loans and unsecured loans) and a resurgence in corporate credit. Demand for credit continues to be quite resilient in corporate as well as retail segments. Despite a 190-bps rate hike, home loans demand continued to remain strong and there are no signs of tepidness. Home loans and unsecured loans are likely to support robust growth in the retail segment. The bank registered strong growth in the corporate segment at 21% y-o-y in Q2FY2023. Demand in the corporate segment was driven by NBFCs, steel, petroleum, power, and construction sectors. The overall capacity utilization for the industry has crossed 75%. Thus, it is likely to augur well for the capex cycle. Currently, the bank has loans amounting to Rs. 3.7 trillion in the pipeline and, thus, credit growth is expected to remain healthy going forward. The bank has been selective in the SME segment and is underwriting loans in a risk-calibrated manner.

Our Call
Valuation – At the CMP, SBI trades at 1.2x/1.0x/0.8x its FY2023E/FY2024E/FY2025E core ABV, respectively. The bank’s robust performance has been aided by strong loan growth, margin expansion, and lower provisions. Asset-quality performance remains strong, with a continuous improvement in headline asset-quality ratios, while the restructured book remains under control at 0.9%. The bank is well-positioned to gain market share on the business front. SBI’s strong deposit franchise and better performance from subsidiaries are likely to favour the business. We maintain our Buy rating on SBI with an unchanged price target (PT) of Rs. 710. SBI remains our top pick in the PSU banks basket.

Key Risks
Economic slowdown leading to slower loan growth and higher-than-anticipated credit cost.

Investment theme
SBI enjoys a dominant position and market share in the Indian banking space, which we expect to be maintained by virtue of its deep penetration into both rural and urban markets. SBI has a strong presence in both retail liabilities as well as retail asset side along with its corporate relationships (due to size, history, and market knowledge), which are key differentiators for it. In addition, due to its size, SBI is the market maker for interest rates, which not only puts it in a dominant position but will also allow it a margin cushion. SBI has the largest customer base in the country, by virtue of its largest and pan-India network, which enables it to be the banker of preference across India but also allows it to explore cross-sell opportunities.

Refer: SBIN for more details.