SBI is the oldest and the largest bank in India, with 22,219 branches. It has a loan book of ~Rs 24t and deposit base of Rs 37t as at FY21.
Motilal Oswal Institutional Equities has maintained 'Buy' rating on State Bank of India with target price of Rs 600 per share.
Key highlights and Investment rationale
Balance Sheet cleansing largely over; strong asset quality outlook: SBIN's focus on strengthening its Balance Sheet has enabled a sharp decline in GNPAs to Rs 1.3t in FY21 from Rs 2.2t in FY18. GNPAs declined by ~43% over the past three years, while PCR increased to 68% at present (85% PCR on the corporate book) from 40% four years back. SBIN has cumulatively written off Rs 1.5t since FY18. The improvement in asset quality has been sharper than most peers, including Private Banks. While 1QFY22 saw a marginal increase, we believe that the Balance Sheet cleansing is largely complete, with the focus shifting to earnings recovery and pursuing growth. Controlled restructuring (0.8%) and SMA book (0.5%) provides a further comfort on asset quality and will drive a sustained reduction in credit cost.
AUCA book increases to Rs 1.72t; recoveries to support earnings: AUCA book has risen to Rs 1.72t (18% CAGR since FY18), significantly higher than the GNPL pool, with historical recoveries in the 6-11% range. Over the past five years, SBIN has recovered ~Rs 400b from the AUCA book. We expect recovery trends to continue (SBIN expects >Rs 100b recovery over FY22) as the IBC process gathers pace after a long pause due to the COVID-19 outbreak. In FY21, normal recoveries were higher (~61%). There are a few other big ticket accounts under resolution like DHFL, which would support asset quality and an earnings recovery.
Mix of doubtful and loss NPLs rises to 39%: The mix of loss and D3 assets rose to ~39% v/s ~10% in FY18, signifying the diminishing requirement of ageing provisions and higher recovery prospects from fully provided /written-off accounts. It now has 85% coverage on its Corporate book, while PCR at 68% stands higher than what is required as per the ECL method. Management has conservatively guided at credit cost of up to 2% for FY22, led by higher provisioning requirement in SME/Agri book.
The elephant is set to dance; RoE to improve to ~15%: SBIN’s earnings in FY21 have been more than the sum of what it did in the preceding five years (FY16-20). Its FY22E earnings will be close to the sum of the past six years (FY16-21). It appears well positioned to report strong uptick in earnings, led by normalization in credit cost. This, along with expected uptick in core operating performance, will further propel earnings growth. We estimate PPOP at 14% CAGR over FY21-23E v/s 6% CAGR (FY18-21), enabling SBIN to achieve ~15% RoE (decadal high) by FY23E.
Valuation and view: Among PSU Banks, SBIN remains the best play on a gradual recovery in the Indian economy, with a healthy PCR, Tier I of ~11.3%, strong liability franchise and improved core operating profit. While business trends were impacted by the lockdowns, loan growth is likely to recover gradually over FY22-23E. Even slippages are expected to moderate meaningfully over 2HFY22 as asset quality remains impeccable in the Retail book. We estimate credit costs of 1.6%/1.3% for FY22E/FY23E. We project RoA/RoE of 0.8%/14.6% by FY23E. Subsidiaries (SBI MF, SBILIFE, SBICARD, SBI Cap) have exhibited robust performances over last few years, supporting our SoTP valuation. Maintain Buy, with TP of Rs 600/share (1.3x FY23E ABV + Rs 190/share from subsidiaries).
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