State Bank of India Near-term challenges but valuations attractive Stock Update Stock
Sector: Banks & Finance We expect State Bank of India (SBI) to be benefitted by the recent corporate tax rate cut, which will lead to a direct benefit in reported Company Update earnings per share (EPS) and better return on equity (ROE), which is a positive. However, expected margin pressure due to shift towards linking all floating rate loans to repo rate, weak credit demand, Change and weakness in agri and SME segment have impacted near-term
á sentiments. Notably, at present, the effective rate for the external Reco: Buy á benchmark (repo rate) linked rates is largely similar (or marginally higher) than the existing MCLR rate for the bank. However, given CMP: Rs. 282 the present regulatory stance, incremental rate cuts (~50 BPS of
á additional repo rate cut in FY2020E is expected) will likely bring
Price Target: Rs. 380 á in faster resets, which may be margin dilutive in the short run. á Notwithstanding, near-term challenges, SBI is the largest bank and á Upgrade No change Downgrade
á á has strong influence on interest rates in the market and will be able to manage its margin spread in the medium run. The recent price correction (~20% in the past three months) factors in most of the Company details negatives, and we believe risk reward has become favourable, with business strengths remaining intact. After factoring the change in Market cap: Rs. 2,51,584 cr tax rate and some margin pressure, we have revised upwards our earnings for FY2020E/FY2021E. The stock trades at 1.1x its FY2021 52-week high/low: Rs. 374/248 book value. We maintain our rating to Buy with an unchanged price target (PT) of Rs. 380 (1.5x its FY2021 BV). NSE volume: (No of 261.1 lakh Benefits to accrue but uncertainties tinge outlook: The recent shares) government’s steps to reduce corporate tax rate will benefit the bank and would be positive for bottom-line growth. However, there are other BSE code: 500112 uncertainties that may offset benefits from reduction in corporate tax rate. SBI has linked its lending rate to external benchmark (repo rate) NSE code: SBIN effective October 1, 2019. We believe fresh loans offered will result in marginally lower incremental yields, which will be margin dilutive in Sharekhan code: SBIN the short run. Moreover, in the recent quarter gone by, there was a spike in fresh NPA accretion (agri loans saw weakness) and considering Free float: (No of 382.6 cr the slowdown in the economy, floods in various states and absence shares) of large resolutions, have also dampened sentiments. Going forward, there is possibility of increased slippages from the SME and agri sectors. Hence, we expect credit cost to remain slightly elevated. We expect Shareholding (%) overall credit growth to marginally outpace the industry average as we believe SBI will be better placed to compared to several of the Promoters 57.9 competition in terms of capital levels and reach. FII 10.9 Valuation: DII 23.6 Others 7.7 SBI trades at 1.1x its FY2021E book value, which we believe is reasonable, considering its size, business strengths, market maker position, and better operating metrics in the PSU space. The recent correction has made risk reward favourable. We have been conservative Price chart in our estimates. We have fine-tuned our FY2020E/FY2021E earnings estimates, considering the recent changes. We maintain our Buy rating 450 on the stock with an unchanged PT of Rs. 380. 400
350
300 Key Risks
250 Risk of further NPAs cropping up, especially in the corporate, agri and/ or retail segments due to the overall macroeconomic slowdown in 200 19 18 19 19 recent times. - - - - Jan Sep Sep May
Valuation Rs cr Particulars FY18 FY19 FY20E FY21E Price performance Net interest income (Rs cr) 74,854 88,349 92,843 1,04,858 (%) 1m 3m 6m 12m Net profit (Rs cr) (6,547) 862 17,598 22,382 EPS (Rs) (7.3) 1.0 19.7 25.1 Absolute 3.4 -21.4 -4.7 3.5 PE (x) (38.4) 291.9 14.3 11.2 Book value (Rs/share) 211.3 213.3 228.4 247.6 Relative to P/BV (x) 1.3 1.3 1.2 1.1 -1.7 -20.0 -7.4 -3.0 Sensex RoE (%) (3.2) 0.4 7.7 9.2 RoA (%) (0.2) 0.0 0.5 0.5 Sharekhan Research, Bloomberg Source: Company, Sharekhan Research
September 26, 2019 2 Stock Update Stock
External benchmark to lead to faster policy transmission: The Reserve Bank of India (RBI) has mandated all banks to link all new floating rate retail and micro and small enterprise loans to an external benchmark effective October 1, 2019. Banks need to choose external benchmark out of GOI 3M/6M T-bill yield published by FBIL or RBI repo rate. SBI has opted to link its loan to RBI’s repo rate.
Since, the bank is free to decide spread over the RBI’s repo rate, we believe adverse impact on margins may be minimal. That said, in the near term, as the liability costs may adjust with a lag, near-term rate cuts may be margin dilutive, but only for the short term.
RBI repo rate v/s SBI 1 year MCLR
9.00
8.00
7.00
6.00
5.00
RBI Repo rate SBI 1- Year MCLR
Source: Company, Sharekhan Research
Going forward, we expect SBI, which is a market dominant player, to adjust its liability profile to factor in the repo movement in the medium term. Moreover, we expect rates to be near bottom and envisage cuts by the RBI would be limited from here on. In a rising interest rate scenario, we believe the resets will be faster for yields as compared to costs, which therefore may provide some margin benefit to stronger players such as SBI.
Challenges to improvement in asset quality: PSU banks, including SBI, have been challenged with asset- quality issues for quite some time now. While a significant portion of cleaning exercise (especially corporate) has been undertaken and lot of stressed book has been recognised, current slowdown situation is causing recovery to be prolonged. And in the agri segment and MSME would be the key monitorables. Also, the economic slowdown and floods in various states would add to growth and asset-quality concerns. Less/no large ticket resolution of late was also a disappointment. However, we are hopeful, backed by a proactive legislation and regulator’s intent, the recovery/resolution process is delayed but not derailed.
Movement of NPLs Rs cr Particulars Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Op balance 223,462 212,875 205,898 187,798 172,783 Additions 9,984 10,725 4,523 7,505 16,212 increrase in O/S 4,365 163 2,018 456 783 Upgradation and Recovery 14,856 4,327 6,617 5,712 5,769 Write off 10,080 13,538 18,024 17,264 15,482 Closing gross 212,875 205,898 187,798 172,783 168,527 Source: Company; Sharekhan Research
September 26, 2019 3 Stock Update Stock
Financials in charts
Advances trend Loan Mix
100.0 2400000 17.0
12.0 75.0 2100000 7.0 1800000 50.0 2.0
1500000 -3.0 25.0 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Advances (Rs Cr) growth YoY (%) (RHS) Domestic Foreign
Source: Company, Sharekhan Research Source: Company, Sharekhan Research
Deposits trend Asset Quality Movement
50 250000
3200000 40 200000 16.0 30 2800000 150000 11.0 20 2400000 6.0 10 100000
2000000 0 50000 1.0 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20
Deposits (Rs Cr) growth YoY (%) (RHS) GNPA (Rs Cr) NNPA (Rs Cr) CASA (%) (RHS) GNPA (%) RHS NNPA (%) RHS
Source: Company, Sharekhan Research Source: Company, Sharekhan Research
NIMs, Yields on Advances, Cost of Deposits Return Ratios (Calc.)
9.0 10.0 10.0 1.5 8.0 6.0 1.0 6.0 4.0 2.0 7.0 0.0 0.5 -2.0 3.0 -4.0 0.0 -6.0 -8.0 0.0 4.0 -10.0 -0.5 FY20E FY21E Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 NIMs (%) COD (%) YOA (%) RHS ROE (%) ROA (%) RHS
Source: Company, Sharekhan Research Source: Company, Sharekhan Estimates
September 26, 2019 4 Stock Update Stock
Outlook SBI is a market leader and an attractive business franchise. The bank is well placed to gain market share from other PSU banking peers, especially in specific customer segments. While the corporate tax rate cut adds 10-12% to the bottom line, the near-term impact of repo rate linked loans may suppress gains for the bank in the near term. The sale of SBI cards divestment, likely to happen next year, will add positive cushion to valuations. While near-term outlook may have some clouds in terms of possible elongated asset-quality recovery trajectory, slow credit offtake (growth impact) and potential margin compression due to aggressive rate transmission, however, positives of structural and business tailwinds are present. While the rate cut cycle may be near bottom, as and when the cycle reverses, banks, especially industry leaders such as SBI can see margin gains. Valuation SBI trades at 1.1x its FY2021E book value, which we believe is reasonable, considering its size, business strengths, market maker position, and better operating metrics in the PSU space. The recent correction has made risk reward favourable. We have been conservative in our estimates and we have fine-tuned our FY2020E/FY2021E earnings estimates, considering recent changes. We maintain our Buy rating on the stock with an unchanged PT of Rs. 380.
One year forward P/BV (x) band
2.5
2.0
1.5
1.0
0.5 16 17 18 19 17 18 19 ------Sep Sep Sep Sep Mar Mar Mar
PBV +1 sd 3-yr Avg -1 sd
Source: Sharekhan Research
Peer Comparison CMP P/BV(x) P/E(x) RoA (%) RoE (%) Particulars Rs/Share FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E State Bank of India 282 1.2 1.1 17.1 14.2 0.5 0.5 7.7 9.2 Punjab National Bank 63 0.6 0.5 3.8 3.2 0.4 0.4 9.7 14.6 Bank of India 68 0.7 0.6 12.5 8.7 0.3 0.4 4.5 7.6 Bank of Baroda 96 0.6 0.5 5.4 4.4 0.6 0.7 9.6 11.5 Source: Company, Sharekhan research
September 26, 2019 5 Stock Update Stock
About company State Bank of India (SBI) is a largest public sector bank in terms of assets, deposits, branches, number of customers and employees (>22000 branches as of June 2019) having pan-India presence. The bank has been designated by the RBI as a Domestic Systemically Important Bank (D-SIB), which means that its continued functioning is critical for the economy. The bank is better capitalized than most PSU banks, it is well placed to gain market share as well as key clients by virtue of lesser competitive pressures.. The bank is well placed to secure growth capital from the government, not only by virtue of being the largest bank, but also with operating parameters that have improved greatly as compared to its peers.
Investment theme State Bank of India enjoys a dominant position and market share in the Indian banking space, which we expect to be maintained in the foreseeable future as well, by virtue of its deep penetration and superior systems. 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. Also, due to its size, SBI is the market maker for Interest rates which not only puts it in a dominant position but also will allow it with margin cushion. We believe that the banking system NPAs have peaked with the stressed assets for Indian banks at ~15% of loans. Going forward, as NCLT / IBC etc work to resolve / recover tangled NPAs, with crucial Govt support leading to faster resolutions, and better loan discipline. We expect a gradual normalization NPA recognition from here. 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.
Key Risks Risk of further NPAs cropping up, especially in the corporate, agri and/or retail segments due to the overall macroeconomic slowdown in recent times.
Additional Data
Key management personnel Shri Rajnish Kumar Chairman Shri P. K. Gupta Managing Director (Retail & Digital Banking) Shri Dinesh Kumar Khara Managing Director (Global Banking & Subsidiaries) Shri Arijit Basu Managing Director (Commercial Clients Group & IT) Shri Anil Kishora Deputy Managing Director & Chief Risk Officer Shri B. Ramesh Babu Deputy Managing Director & Chief Operating Officer Source: Company Website
Top 10 shareholders Sr. No. Holder Name Holding (%) 1 Republic of India 57.1 2 Life Insurance Corp of India 10.0 3 HDFC Asset Management Co Ltd 3.3 4 ICICI Prudential Asset Management 2.2 5 SBI Funds Management Pvt Ltd 2.1 6 Reliance Capital Trustee Co Ltd 2.0 7 Aditya Birla Sun Life Asset Manage 0.8 8 BlackRock Inc 0.7 9 Vanguard Group Inc/The 0.7 10 Kotak Mahindra Asset Management Co 0.7 Source: Bloomberg
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.
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