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State Bank of India (STABAN) | 280 Target : | 340 Target Period : 12 Months Potential Upside : 21% Consolidation Pain to Ease Off Gradually

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State Bank of India (STABAN) | 280 Target : | 340 Target Period : 12 Months Potential Upside : 21% Consolidation Pain to Ease Off Gradually Result Update August 14, 2017 Rating matrix Rating : Buy State Bank of India (STABAN) | 280 Target : | 340 Target Period : 12 months Potential Upside : 21% Consolidation pain to ease off gradually... • Post-merger of associate banks, State Bank of India (SBI) has What’s changed? (Merged bank) announced its performance for the first time Target Unchanged EPS FY18E Introduced at | 11.4 • Slippages for the merged entity remained higher at | 26249 crore EPS FY19E Introduced at | 16.5 (| 28590 crore in Q1FY17), led by slippage from non-corporate book Rating Unchanged (agri + retail + SME) at | 17886 crore. This is attributable to farm loan waivers, end of forbearance on loan classification and non- Quarterly performance (Merged bank) alignment of exposure below | 50 crore from subsidiaries Q1FY18 Q1FY17 YoY (%) Q4FY17 QoQ (%) • Corporate slippages were at | 8363 crore, of which substantial NII 17,606 18,246 (3.5) 21,065 (16.4) proportion (| 7976 crore) came from watchlist. Consequently, Other income 8,006 8,761 (8.6) 12,222 (34.5) watchlist declined from | 32427 crore to | 24444 crore. GNPA was at PPP 11,874 13,762 (13.7) 17,309 (31.4) PAT 2,006 374 436.2 (3,442) (158.3) | 188069 crore (GNPA ratio at 9.97%) vs. | 177866 crore in Q4FY17 • Exposure to 12 accounts referred to IBC was at | 50247 crore with Key financials (Merged bank) outstanding provision at | 19943 crore. Exposure restructured under | Crore FY18E FY19E SDR was at | 12807 crore, while S4A accounts is at | 8124 crore. NII 87,010 96,920 Standard restructured assets were at | 39337 crore. Total stressed PPP 25,261 27,119 assets (GNPA + RA) were at 12.05% of advances PAT 9,849 14,194 [ • NII (merged bank) came in at | 17606 crore, down 3.5% YoY, led by Valuation summary (Merged bank) ~48 bps YoY decline in margin. Other income came at | 8006 crore, FY18E FY19E down 8.6% YoY, led by one-off gains of | 907 crore from sale of P/E 24.5 17.0 stake in NSE in Q1FY17 Target P/E 29.8 20.7 • Provision came at | 8929 crore, down 31.5% YoY and 57.3% QoQ. P/ABV 1.8 1.8 However, NPA related provision increased to | 12125.3 crore vs. Target P/ABV 2.2 2.0 | 6339.6 crore YoY. Lower provision in the quarter led to revival in RoE 4.4 5.9 profit at | 2006 crore, up 436% YoY, after reporting loss in Q4FY17 RoA 0.3 0.4 [ • Advances growth remained sluggish at ~1.5% YoY to | 18.86 lakh Stock data crore, led by slower offtake in corporate and SME segment. Growth Market Capitalisation | 242258 Crore in the retail book remained healthy at 13.3% YoY. Deposit growth GNPA | 188069 Crore came in at 13.3% YoY to | 26.02 lakh crore with CASA at 44.38% NNPA | 107760 Crore • The management expects 6-8% YoY growth in advances in FY18E. NIM 2.4% Slippages are guided to decline below 3.3% for FY18E. 52 week H/L 315/224 Subsequently, credit cost is seen remaining lower at 2.25% vs. Networth | 229025 Crore 2.48% in Q1FY18. Higher recovery, increased proportion of advances Face value | 1 and re-pricing of CoF to lead to 10-15 bps improvement in margins DII Holding (%) 21.6 FII Holding (%) 11.2 RoA improvement to take longer; structural value remains intact; BUY [ Merger with associate banks has resulted in huge NPA stress and Price performance subsequently muted profits. Clarity on loan waiver and completion of Return % 1M 3M 6M 12M merger process is expected to yield healthy recovery/upgrade in non SBI 11.8 2.1 10.0 35.3 corporate pie. However, a recovery in the corporate segment remains BOI 15.7 -17.6 19.2 43.6 uncertain with the outcome of insolvency resolution to be seen. With PNB 10.6 -15.8 0.6 23.4 completion of merger process, business growth will remain in focus. Post Research Analyst capital raising in recent QIP, capital adequacy ratio (CAR) was at 13.3% with CET1 at 10.06% remaining sufficient for near term credit offtake. Kajal Gandhi [email protected] Inflow of ~| 5000-6000 crore, from SBI Life IPO will add further to its capital adequacy, enabling it to manage future credit growth and NPA Vishal Narnolia resolution (we have not factored in one-time gains in FY18E EPS). Return [email protected] ratios are expected to take longer to improve due to lower profits in merged entity. However, long term structural value remains intact. Vasant Lohiya Therefore, we continue to maintain our target price of | 340/share, [email protected] valuing the merged bank at 1.6x FY19E ABV (| 168/share) and subsidiaries at | 64/share. Strategic stake in non-core investments like NSE (5.19%), BSE (4.75%), NSDL, ARCIL, UTI AMC, etc, may add further value, while management change remains near term hangover. We reiterate our BUY recommendation on SBI. ICICI Securities Ltd | Retail Equity Research Variance analysis (Consolidated basis) Q1FY18 Q1FY17 YoY (%) Q4FY17 QoQ (%) NII 19,323 19,673 -1.8 22,643 -14.7 NIM (%) 2.6 2.9 -37 bps 2.8 -25 bps Other Income 13,958 13,375 4.4 20,264 -31.1 Net Total Income 33,281 33,048 0.7 42,908 -22.4 Operating expense 19,864 18,499 7.4 37,862 -47.5 PPP 13,417 14,549 -7.8 17,694 -24.2 Provision 9,051 13,131 -31.1 21,070 -57.0 PBT 4,366 1,419 207.7 -3,376 -229.3 Tax Outgo 1,261 551 128.6 7 17,027.6 PAT 3,032 1,046 189.9 -2,978 -201.8 Key Metrics Advances 1834700 1820308 0.8 1896887 -3.3 Deposits 2,618,464 2,311,338 13.3 2,599,811 0.7 [[[ Source: Company, ICICIdirect.com Research Variance analysis (Merged bank) Q1FY18 Q1FY17 YoY (%) Q4FY17 QoQ (%) NII 17,606 18,246 -3.5 21,065 -16.4 NII (merged bank) remained subdued led by ~48 bps YoY decline in margins NIM (%) 2.4 2.8 -48 bps 2.7 -38 bps Decline in margins is attributable to margin erosion in subsidiaries Other Income 8,006 8,761 -8.6 12,222 -34.5 Optically negative growth led by one-off gains from sale of stake in NSE in Q1FY17 Net Total Income 25,612 27,007 -5.2 33,287 -23.1 Operating expense 13,718 13,245 3.6 15,978 -14.1 PPP 11,874 13,762 -13.7 17,309 -31.4 Provision 8,929 13,037 -31.5 20,932 -57.3 NPA related provision increased to | 12125.3 crore vs | 6339.6 crore YoY PBT 2,945 725 306.1 -3,623 -181.3 Tax Outgo 939 351 167.5 -181 -618.8 PAT 2,006 374 436.2 -3,442 -158.3 Lower provision led to revival in bottomline Key Metrics Slippages remained elevated at | 26249 crore vs | 28590 crore in Q1FY17, led by slippage GNPA 188,068 137,662 36.6 177,866 5.7 from non-corporate book at | 17886 crore NNPA 107,760 78,242 37.7 96,978 11.1 NNPA ratio increased 78 bps QoQ to 5.97% Total Restructured assets 39,337 39,055 0.7 36,634 7.4 Total stressed assets (GNPA + RA) stood at 12.05% of advances Advances 1886666 1859513 1.5 1952507 -3.4 Corporate segment growth remained sluggish. Healthy growth in retail at 13.3% YoY Deposits 2,602,534 2,297,426 13.3 2,585,320 0.7 CASA remained healthy at 44.38% Source: Company, ICICIdirect.com Research Change in estimates (Merged Bank) Current FY18E FY19E Credit growth (%) 8.0 10.0 Deposit Growth (%) 10.0 10.0 Cost to income ratio (%) 49.2 48.2 GNPA ratio (%) 9.6 8.7 NNPA ratio (%) 5.0 4.5 Credit cost (%) 2.7 2.5 Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 2 Company Analysis Merger update SBI has merged its five associate banks. These five associate banks are State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore. Besides, Bhartiya Mahila Bank (BMB) has been merged. As per the merger plan, State Bank of Bikaner and Jaipur shareholders got 28 shares of SBI (| 1 each) for every 10 shares (| 10 each) held. Similarly, State Bank of Mysore and State Bank of Travancore shareholders got 22 shares of SBI for every 10 shares. With this merger, SBI has joined the league of top 50 banks globally in terms of assets. The total customer base of the bank will reach ~37 crore with a branch network of around 24,000 and nearly 59,000 ATMs across the country. The government holding in the merged SBI will be 60.6% vs. 61.3% pre-merger. The treasury of the associate banks will be merged to function out of the corporate office of SBI at Mumbai. The merged entity has a deposit base of more than | 26 lakh crore with advances of about | 18.60 lakh crore as on April 1, 2017. However, merger with associate banks will result in muted profits for the bank initially, as subsidiaries (five banks) reported FY17 loss of | 11866 crore with Q4 alone at | 6000 crore due to cleanup of NPA stress vs. SBI’s standalone profit of | 10400 crore in the same period.
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