SBI hits record high post Q3 results; CLSA lists 3 triggers for re-rating

Topics sbi | Markets | CLSA

Slower-than-expected uptick in India’s economic growth amid ongoing Covid-19 outbreak and/or a sharp rise in interest rates, however, remain key risks to CLSA’s valuation thesis
Positively surprising Street for sixth quarter in a row, State Bank of India (SBI) on Thursday reported a beat on its December quarter results (Q3FY21) on the back of healthy asset quality, fewer fresh slippages, and lower-than-projected rise in provisions.

At the bourses, investors rewarded the stock as it hit a lifetime high of Rs 408 apiece, up 15 per cent on the BSE in the intra-day trade. It surpassed its previous record high of Rs 373.7 per share hit on July 18, 2019. The stock closed around 11 per cent higher on the BSE, as against a 0.23 per cent rally in the benchmark S&P BSE Sensex. Moreover, the stock has zoomed over 39 per cent this week, clocking its best weekly gain in 30 years.

 
Commenting on the bank's performance, Dinesh Khara, chairman, SBI said that the lender provided for stress upfront, even when we have a rumbling of something (stress) that is building up. "A combination of this approach and a visible improvement in asset quality augurs well for India’s largest state-owned bank," he said.

 
Analysts, too, seem to be corroborating to the view. CLSA, for instance, has raised its target price on the stock by an impressive 45.45 per cent to Rs 560 from Rs 385. This also reflects a 58 per cent upside from the stock’s market price as on Thursday.

ALSO READ | SBI Q3 net profit slips 7% YoY to Rs 5,169 cr on higher provisions

 
"SBI's asset quality is finally delivering better asset quality outcomes compared even to private banks. We revise up our earnings by 15-26 per cent and now expect return on equity (ROE) of 14 per cent by FY23CL. The bank has been a consistent market-share gainer over the last decade and, now, with a dual benign credit cycle from FY22CL, we expect SBI to re-rate materially beyond 1x book," it said in its note dated February 4.

 
Slower-than-expected uptick in India’s economic growth amid ongoing Covid-19 outbreak and/or a sharp rise in interest rates, however, remain key risks to CLSA’s valuation thesis.

 
Here're the key triggers for the stock's future re-rating:

 
Asset Quality: Contrary to analysts' expectations, SBI reported an improvement in stressed loans with gross NPA ratio coming down to 4.77 per cent during the quarter from 5.28 per cent in Q2FY21. NNPA, on the other hand, improved to 1.23 per cent, down from 1.6 per cent QoQ.

 
"In the absence of the Supreme Court's order, the GNPA and NNPA would have been at 5.44 per cent and 1.81 per cent, respectively," the bank said in its statement.

 
Fresh slippages, meanwhile, were reportedly at Rs 237 crore during the quarter, plunging 98.5 per cent YoY and 91.4 per cent QoQ from Rs 16,525 crore, and Rs 2,756 crore, respectively.

 
Accounting for the Rs 13,000 crore of recovery/upgrades, net slippages was even lower at Rs 10,000 crore. With restructuring requests at little over Rs 18,000 crore in Q3FY21 (taking total amount at Rs 41,000 crore in 9MFY21), CLSA opines the lender should now be able to contain total restructured loans well within its guidance of Rs 60,000 crore for the whole fiscal year. 

 
"We have noted that SBI's retail credit cost in the last decade was less than 40-50bps but weak corporate credit cycle led to a spike in overall credit costs. This, however, should normalise now. We thus expect credit costs to reduce to 110bps by FY23CL," it said in its report.

 
 A quick glance at the financial statement of the lender also shows that SBI’s corporate book is now in a better position than it was a year ago. With the corporate gross non-performing assets (NPA) ratio falling from 12.16 per cent last year to 7.54 per cent in Q3 (factoring in the Supreme Court’s stay).

 
However, higher slippage from this segment can lead to additions to gross NPLs and hinder earnings and book value, CLSA cautioned.

ALSO READ | SBI: Turning over a new leaf, poised to benefit from credit growth

 
Strong NII provision: Despite a low growth, low interest rate macro-environment, CLSA highlights that SBI has been able to clock strong growth in net interest margins (NIMs) in spite of high liquidity sustaining at 20bps higher than FY20 levels.

"Through the last 1-2 years, SBI has cut its savings account rates by 100bps and still sustained current account-savings account (CASA) ratio of 45 per cent," it added.

 
During the quarter under study, net interest income – or income derived by subtracting interest paid on loans from interest received on deposits – was up 3.7 per cent YoY at Rs 28,820 crore, as against Rs 27,778.8 crore in Q3FY20. It increased 2 per cent QoQ from Rs 28,181.5 crore reported in Q2FY21. Domestic net interest margin (NIM) for the quarter remained stable sequentially at 3.34 per cent. 

 
Earnings upgrade: The state-owned bank’s capital took a mild hit on a quarterly basis, with the common equity tier-1 (CET-1) ratio sliding 22 bps YoY to 10.27 per cent from 10.49 per cent in Q2FY21. On a yearly basis, however, it improved 9bps.

 
"With our revised earnings, we expect ROEs of around 13.5-14 per cent by FY22/23CL now and expect CET to improve organically to over 11 per cent due to higher profitability," CLSA said. SBI's ROE during the first 9 months of FY21 is at 9.49 per cent, compared with 8.15 per cent 9MFY20. 

 
Given this, the brokerage believes being the biggest beneficiaries of the benign corporate credit cycle; consistent gain in loan/deposit market share in the last decade; and with ROAs of 90bps, which would be comparable to the FY10-14 cycle, SBI remains a "deep value opportunity and current re-rating should continue".


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