Published on 18/05/2019 10:58:56 AM | Source: HDFC Securities Ltd

Buy State Bank of India Ltd For The Target Rs.383 - HDFC Securities

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Glide path clearer

While SBIN’s profits were hit in 4QFY19 by higher provisions, best-in-class coverage was a positive outcome. A possible fund-raise will be book accretive. Maintain BUY with an SOTP of Rs 383 (1.3x Mar-21E ABV of Rs 222 + Rs 95 sub value).



* Delinquent Loans Dip: Led by high W/Os (~Rs 173bn) and lower slippages (~Rs 80bn, 1.50%), GNPAs dipped ~8% QoQ (Rs 1.72tn, 7.5%). LLPs were ~24% higher QoQ, resulting in a massive ~19% dip in NNPAs (~3%). Calculated coverage jumped ~500bps QoQ to ~62%. SMA I & II nearly halved QoQ to ~36bps, ex-slippages, driven by the upgrade of a large power exposure. Reducing pools of identified stress should reign in near term slippages. We have factored in slippages of 1.80% over FY 19-21E. The glide path is clearer now.

* Bites The Provision Bullet: Led by a ~24% rise in LLPs (Rs 165bn), overall provisions were up ~2.7x QoQ. The bank (finally) provided for the rest of the exposure to Essar Steel. Total provisions against Essar, Bhushan and Alok were ~Rs 100bn in 4Q. The sequential jump in provisions was magnified as 3Q included MTM reversals of ~Rs 80bn. We have lowered our LLP estimates to ~1.42% over FY19-21E. Higher recoveries and upgrades may provide a positive surprise here.

* Growth Picks Up: Loan growth was marginally higher at 13/7%. Domestic advances grew ~14/6% while overseas advances were flat YoY (albeit up ~10% QoQ). The retail book grew ~19/6% to form ~28% of loans. Corporate loans witnessed an uptick, growing ~10% QoQ. Given its size and capital position, we see SBIN growing at no more than ~12% over FY19-21E.

* Near term outlook: Sharp improvement in asset quality should keep the stock in the limelight. STANCE Decline in fresh slippages and higher coverage put SBIN in better stead vs. a year ago, mostly insulating the P&L from shocks. Nevertheless, our earnings estimates are contingent upon smooth recoveries. Partial visibility on the recovery of three large NLCT a/cs (~Rs 160bn) provides some comfort. A book-accretive fund-raise can be expected in the near term. However, we have not factored it into our estimates.


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