Highlights:
-Healthy advances growth, margins stable
-High provision coverage ratio comforting
-Sharp rise in slippages a key concern
-Valuation pricing in most concerns
-Best positioned public sector bank to play asset recovery cycle
---------------------------------------------
State Bank of India (SBI)'s Q1 FY20 earnings and management commentary suggest that a big turnaround in profits is around the corner for the country's largest bank. However, there seems no end to its asset quality woes.
SBI reported standalone net profit of Rs 2,312 crore for the quarter ended June 2019 as against a loss of Rs 4,877 crore in the same quarter last year aided by lower provisions and higher treasury income. Operating performance was good, marked by strong loan growth, stable margins and improvement of the provision coverage ratio (PCR).
Advertisement
But while profit surged, asset quality weakened with a sharp rise in slippages. The street has been hoping for SBI's turnaround as corporate asset quality cycle seems to have turned, but will be disappointed by Q1 FY20 result. We have seen one or two good quarters with receding asset quality issues, but with slippages spiking up again this quarter, the street will have to wait to turn decisively positive on the stock.
Close
SBI stands out because of its sheer size and relatively better operating performance among public sector banks, which are fast losing their relevance in the financial system.
related news
China currency ‘manipulation’: Yuan, treasury and gold in trade war crosshairs
Godrej Agrovet Q1 FY20: Another tepid quarter
Ideas for Profit | Titan Q1 – Steady show amid headwinds
We expect a faster recovery for SBI in contrast to many small to mid-sized public lenders. While fresh impairments were high in Q1, the under-provisioning gap has narrowed. More importantly, the bank is expecting a write back in provisions of Rs 16,000 crore from resolution of 3 accounts from list 1 (Essar Steel, Alok Industries and Bhushan Steel and Power) in the coming months. Hence, we see credit costs declining and providing a big fillip to earnings in FY20. The management's guidance of improvement in consolidated return on assets (RoA) to 1 percent by March 2020 provides direction to investors.
That said, SBI's size, its biggest strength, can turn out to be the biggest risk in two ways.
First, SBI stepping forward to bail out weaker public sector banks or troubled NBFCs cannot be ruled out. We have already seen SBI stepping up funding to NBFCs following the liquidity crisis. Consequently, it has exposure to risky assets. For instance, SBI's exposure to Dewan Housing Finance (DHFL) which is going for a resolution will be around Rs 10,000 crore.
Second, SBI cannot emerge unscathed from any macro-economic slowdown given its size and market share. SBI enjoys 21 percent market share in home loans and 34 percent share in auto loans, making it vulnerable to consumption slowing down.
While both these fears are not unfounded, the current valuation of the stock at 1.1 time FY21 estimated core book value, looks reasonable and is pricing in most concerns.
Key positives
Advances growth was strong at 12 percent YoY. The domestic loan book growth at 12 percent YoY was supplemented by 16 percent growth in overseas loan book. Corporate advances increased by 12 percent YoY aided by credit to the power, roads and NBFC sectors. The growth in retail assets (including SME, Agri & Personal) was at 18 percent.
Net interest income (excluding the one-off item in Q1 FY19) increased 15.5 percent YoY aided by healthy growth in advances and stable overall margins.
While there was an uptick of 5 bps in domestic net interest margin (NIM) to 3.01 percent, NIMs on international book compressed to 1.18 percent in Q1 FY20 from 1.47 percent in Q1 FY19.
Operating expenses were controlled and increased by only 5 percent YoY. Consequently, cost-to-income (C/I) ratio declined to 47.3 percent (excluding pension provisions) in Q1 FY20 from 52.5 percent in Q1 FY19.
Core pre-provisioning profit of the bank increased by 32 percent YoY, excluding the on-off items.
The key positive for the bank is improvement in PCR to a very healthy 79 percent as at end June, increasing by more than 1000 bps YoY and 61 bps sequentially.
PCR on corporates undergoing resolution through National Companies Law Tribunal (NCLTL) stood at 90 percent as at end June. On accounts filed but yet to be admitted to NCLT, PCR is comforting at 79 percent. However, on 20 standard accounts amounting to Rs 19,142 crore (includes Rs 10,000 crore to Dewan Housing) where ICA (inter-creditor agreement) is likely to be signed, PCR is only 15 percent.
On the asset quality front, despite the higher slippages, gross and net non-performing assets (GNPA) ratio was contained at 7.53 percent and 3.07 percent respectively as at end June, almost same as in previous quarter (Q4) due to aggressive write-offs.
Further, the bank’s stressed asset loan pool - key to its future asset quality- encompassing all special mention accounts (SMA 1 and 2) remains contained at Rs 10,289 crore which is aroud 0.5 percent of the loan book.
Key negatives
Deposits growth at 7 percent YoY was much below advances growth. Despite the low cost current and savings account (CASA) deposits growth muted at 7 percent YoY, SBI was able to maintain CASA ratio at around 45 percent of total deposits due to overall weak growth in deposits.
SBI reported muted growth of 4 percent YoY in core fee income.
The biggest negative in Q1 was elevated slippages which doubled to Rs 16,995 in Q1 from Rs 7,961 crore in Q4 due to higher slippages in agriculture book, SME and retail. Increase in corporate slippage was one-off and will be reversed.
Valuations prices in most concernsSBI’s management had earlier articulated its strategy to deliver consolidated return on asset (RoA) of 0.9-1 percent while improving GNPA to below 6 percent and maintaining provision cover above 60 percent by March 2020. With normalisation of credit cost, the target looks achievable. That said, if slippages continue to remain elevated, the bank’s journey to targeted returns will get more arduous.
While the bank’s capital position is adequate for near term growth, it is likely to raise equity in FY20, which will be a key catalyst for the stock.
While FY19 was a year of consolidation, FY20 is likely to be the year of earnings revival. With levers for improvement in return ratios, the current valuation of 1.1 FY21 estimated book value of the core business looks undemanding.
With a turnaround in sight, investors looking to play the asset recovery and resolution cycle should keep the stock on their radar for a long-term bet.
Follow @nehadave01
For more research articles, visit our Moneycontrol Research page
Disclaimer: Moneycontrol Research analysts do not hold any positions in the companies discussed here.Subscribe to Moneycontrol Pro and gain access to curated markets data, exclusive trading recommendations, independent equity analysis, actionable investment ideas, nuanced takes on macro, corporate and policy actions, practical insights from market gurus and much more. First Published on Aug 2, 2019 08:58 pm