State Bank of India Ratings-Purchases: Asset Quality Boosts Earnings Outlook

SBIN is one of the top buys in the banking industry with a TP of 600 rupees (1.4 times FY23e ABV + Rs 190 from a subsidiary / JV).

SBIN shows a significant improvement in asset quality, with GNPA decreasing 43% over the last three years, and PCR increasing from 40% four years ago to 68% now. New slippage plummeted to 1.2% in 2009 (2.5% in the first quarter of 2010), lowering the v / s of many private peers. The AUCA book was Rs 1.72 trillion, higher than the GNPL pool and had a recovery rate in the range of 6-11%. Over the last five years, banks have recovered approximately Rs. 400 billion from AUCA’s books. Due to COVID-19 restrictions, the recovery trend is expected to continue as the IBC process accelerates after a long pause.

SBIN seems to be in a good position to report a significant increase in earnings, driven by the easing of credit costs from 2010. Banks have historically provided over 15% RoE for 10 years, after which the worst phase of the corporate cycle hit earnings and reported consecutive losses in 2017/2018. During 19-21, SBIN showed a significant improvement in asset quality, with net non-performing loans declining from 5.7% in 2018 to 1.8% today, while PCR is a number of well-managed private banks. Is comparable to

The CAGR of PPOP for FY21-23E is estimated to be 14% (v / s CAGR for FY18-21 is 6%). Overall PPOP for provisioning coverage should be enhanced 2.5x by FY23e (v / s averages 1.3x FY18-21), but RoE surged to about 15% and FY23E It reaches the highest value in decades. SBIN is one of the top buys in the banking industry with a TP of 600 rupees (1.4 times FY23e ABV + Rs 190 from a subsidiary / JV).

Balance sheet cleansing is almost done.Strong outlook for asset quality
As SBIN is focusing on strengthening its balance sheet, GNPA dropped sharply from 2.2 trillion rupees in 2018 to 1.3 trillion rupees in 2009. GNPA has decreased by about 43% over the last three years, but PCR has increased from 40% four years ago to 68% now (85% PCR in corporate books). Banks have amortized a cumulative total of Rs 1.5 trillion since 2018. Asset quality improvements are more rapid than most peers, including private banks. Despite a slight increase in the first quarter of 2010, balance sheet cleansing is almost complete, with a focus on recovering profits and pursuing growth. Managed restructuring (0.8%) and SMA books (0.5%) make asset quality even more comfortable and drive sustainable reductions in credit costs.

Subsidiaries are still strong industry-leading compounding machines
SBI’s subsidiaries, SBIMF, SBI Life Insurance, SBI Insurance, and SBI CARD, have performed well in their respective segments and have become market leaders. Subsidiaries’ contributions to SoTP have increased significantly. Currently, it contributes up to 32% to SoTP (up to 42% in CMP). We hope that the strong performance of the subsidiary will continue and add value to SoTP as a whole. Unlocking value from SBIMF and SBI General Insurance may bring additional benefits.

Rating and display
SBIN has historically provided over 15% RoE over a decade before the worst phase of the corporate cycle hits revenue. FY21 / Q1 FY22 performed well in a harsh environment. Deposit growth was strong, driven by the healthy trend of CASA, but lending growth is likely to recover gradually from 2010 to 2011. The outlook for asset quality remains particularly promising. A continuous recovery will further support the momentum of earnings. SBIN holds approximately Rs. 91 billion of unused COVID-related reserves, which should limit credit costs. SBIN reported a RoE of approximately 9.5% in FY2009. This is the highest since AQR was launched in 2016 and is currently aiming to regain 15% RoE in the medium term. Predict RoA / RoE of 0.8% / 14.6% by FY23e and repeat with SBIN as top buy.

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