State Bank of India. Institutional Equities. 3QFY19 Result Update BUY

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1 3QFY19 Result Update State Bank of India 4 February 2019 Reuters: SBI.BO; Bloomberg: SBIN IN Domestic Growth Continues To Accelerate State Bank of India (SBI) reported its 3QFY19 results with the key pointers being: (1) For the third consecutive quarter, gross NPA addition at Rs 65.41bn was materially lower than past run rate till 4QFY18 (2) Whole bank NIM improved 3 bps QoQ to 2.76%, with management guiding for a whole bank NIM of ~3% in FY20 (3) Domestic credit growth improved further to 15.6% YoY (4) Opex growth was optically higher at 20.5% YoY due to higher provision for terminal benefit and wage revision. (See detailed analyst meet takeaways on page 2 for significant incremental colour). Per se, on the key P&L items, SBI posted NII growth of 21% YoY at Rs227bn, PPOP growth of 7% YoY at Rs126bn and PAT moved into the black at Rs 40bn compared with -Rs 24bn last year. We have revised our estimates for FY19/FY20/FY21 and retained Buy rating on SBI, revising our target price to Rs347 (from Rs344 earlier), valuing the stock at 1.4x 1HFY21E P/ABV and ascribing a value of Rs65 for subsidiaries. For the third consecutive quarter, gross NPA addition at Rs 65.41bn was materially lower than past run rate till 4QFY18: Gross NPA addition was Rs 65.41bn compared with a past-10 quarter average of Rs bn till 4QFY18. Management stated that slippages could range between Rs bn in FY20 and cited the same number for credit costs for FY20. Non-fund exposure to all NPA has now fallen below Rs 100bn. Corporate slippages during the quarter came in at just Rs 1.31bn. SBI discontinued the disclosure of watchlist citing lack of relevance and, instead disclosed SMA1 and SMA2 book for all accounts in excess of Rs 50mn. (It may noted that SMA1 and SMA2 figures disclosed in 2QFY19 presentation were for corporate book alone and hence, not comparable.) SMA1 and SMA2 taken together amount to Rs 17.06bn or 79 bps of advances. Management stated there are 8 accounts (5 from NCLT list and 3 from power sector) worth ~Rs 340bn which are in advanced stages of resolution and a provision write-back of ~Rs 60bn is expected from the same. SBI also disclosed that a certain NCLT list 1 account carrying a provision of Rs 52.75bn (50% PCR) has moved from D2 to D3 category but provision has not been raised to 100%, with permission from RBI, given they expect full recovery of book value of loan. Provision cover of NCLT List 1 stands at 66% whereas that on NCLT list 2 stands at 86%. Management had, earlier, indicated recovery from NCLT list 2 would be about 30%. Provision cover on power sector NPA has been taken to ~50% which has been deemed largely adequate. Overall PCR, with and without AUCA, stood at 74.6% and 56.9%, respectively. Whole bank NIM improved 3 bps QoQ to 2.76%, with management guiding for a whole bank NIM of ~3% in FY20: Management sounded fairly positive on margin opining that domestic NIM could be in excess of 3% in FY20 and whole bank NIM could be about 3%. As per management, increasing proportion of performing assets would be tailwind for margin. They also stated the bank has been able to push up margin on their high quality corporate accounts. Cost of funds for SBI actually declined 1 bp QoQ to 5.09% putting the spotlight on the bank s differentiated liability profile. CASA ratio was stable at 45.2% despite a low card rate of 3.5%. Management also stated that bulk term deposit card rate was the same and retail term deposit card rate. Domestic credit growth improved further to 15.6% YoY: Domestic loan growth was driven by corporate advances growth of 20.7% YoY, with share of corporate advances standing at 41.2% of domestic advances. Core retail (personal segment) also displayed reasonable strength, growing 17.6% YoY with share of core retail standing at 32.6% of domestic advances. Overseas advances de-grew -7.8% YoY dragging whole bank loan growth down to 12.4% YoY, which is materially faster than the 9.3% YoY growth witnessed as of 2QFY19. Share of overseas advances in whole bank advances stood at Opex growth was optically higher at 20.5% YoY due to higher provision for terminal benefit and wage revision: A provision of about Rs 15bn was made for retiral benefits during the quarter due the decline in bond yields leading to a 125% rise in provision for employees to Rs 45.41bn. Salary, a more structural component of staff expenses, grew just 2.4% YoY to Rs 66.31bn. A key reason for this is the process of digitization ongoing within SBI, which is reflected in the share of branch channel in transactions declining to 12.3% in 3QFY19 compared with 16.2% in 3QFY18. Valuation and outlook: We have retained our NII estimates, revised our PPOP estimates by 0.1%/0.1%/0.1% and PAT estimates by 0.3%/0.1%/0.1% for FY19/FY20/FY21, respectively. We have valued SBI at 1.4x 1HFY21E P/ABV, ascribing a value of Rs65 for subsidiaries and revising our target price on it to Rs347 (from Rs344 earlier). BUY Sector: Banking CMP: Rs284 Target Price: Rs347 Upside: 22% Shivaji Thapliyal Research Analyst shivaji.thapliyal@nirmalbang.com Raghav Garg Research Analyst raghav.garg@nirmalbang.com Key Data Current Shares O/S (mn) 8,924.6 Mkt Cap (Rsbn/US$bn) 2,538.2/ Wk H / L (Rs) 326/232 Daily Vol. (3M NSE Avg.) 19,679,880 Price Performance (%) 1 M 6 M 1 Yr SBI (5.1) (3.6) (7.1) Nifty Index (0.2) (4.0) (1.1) Source: Bloomberg and Y/E March (Rsmn) 3QFY19 3QFY18 2QFY19 YoY (%) QoQ (%) Interest income 622, , , Interest expenses 395, , , Net interest income 226, , , NIM (%) bps 3 bps Non-interest income 80,352 80,842 78,145 (0.6) 2.8 Total income 307, , , Staff costs 111,719 84,968 96, Other operating expenses 69,293 65,203 66, Total operating expenses 181, , , Cost to income (%) bps 189 bps Pre-provisioning operating profit 126, , , Provisions 60, , ,922 (68.2) (50.3) Exceptional Items , PBT 66,187 (71,216) 18,127 NA Tax 26,639 (47,053) 8,678 NA Effective tax rate (%) 40.2 NA Net profit 39,548 (24,164) 9,449 NA EPS (Rs) 4.4 (2.8) 1.1 NA BV (Rs) (1.8) 1.1 Deposits 28,305,377 26,512,399 28,074, Advances 20,477,790 18,262,119 19,573, Source: Company, Nirmal Bang Research

2 Comprehensive Analyst Meet Takeaways Asset Quality The bank has carried out accelerated provisioning worth Rs. 50 bn of during the quarter, over and above what was required by the RBI. This is also why credit costs look high. GNPA on the other personal loans segment is high on account of education loans. As per the bank, Rs. 340 bn worth of exposure (spread over 8 accounts 5 NCLT and 3 from power sector) is in advanced stages of resolution (prices have been discovered). The bank is only awaiting adjudication from the NCLT or regulatory approval for power assets. This could happen in the next 2 months, which would bring down GNPAs below 7% and NNPAs below 3%. The bank would also see write back of Rs. 60 bn. Going forward, the bank will be focusing on and disclosing the SMA 1 & 2 book which is reported to RBI on weekly basis and the erstwhile watchlist has now become irrelevant. The bank believes 50% PCR on power assets is adequate, given the prices expected to be discovered during the resolution process, as per discussions gone by. Regarding PCR on NCLT cases, the bank believes it could see write back of Rs. 60 bn on NCLT list 1. The bank is expecting good recoveries in NCLT list 2. Fresh slippages will be contained at 2% for FY19 (~Rs. 400 bn in absolute terms). For FY20, the bank has guided for gross slippages of Rs bn. For credit costs in FY20, management guided for the same number range. The stock of accounts under MSME dispensation of Rs bn is all eligible for restructuring. Regarding DHFL (exposure of Rs bn), the bank does not see any default risk given their debt service coverage and ALM are comfortable. Some of the holding company accounts (3-4) of IL&FS group are already substandard. On this exposure of ~Rs. 9 bn, the bank has provided 50% (vs. 15% mandated by the RBI). Of the total SMA 1 and 2 stock of Rs. 170 bn, Rs. 93 bn is corporate in nature. AUCA stock is Rs trn. The bank made Rs 15 bn of pension related provisions during the quarter. Net gain was Rs. 65 bn on account of yield movement when write-back of investment provision is also considered. As per the bank, 1 bps movement in yield equals to an impact of Rs. 0.8 bn. Break up fresh slippages (of Rs bn) SME Rs bn (Rs bn for 9MFY19) Agri Rs bn Personal Rs bn Corporate Rs bn (Rs. 82 bn in 9MFY19) Slippage on account of increase in outstanding is due to crystallisation of LC/BGs on NPA accounts. LC/BGs outstanding to NPA accounts is now below Rs. 100 bn and largely in EPC and telecom space. Agri slippages have relatively been under control and the bank hasn t seen much impact of the loan waivers. The bank has a crop loan portfolio of Rs. 1 trn across the country. Apart from the entrepreneur based NBFC exposure, the bank does not have any concerns regarding their NBFC exposure. 2 State Bank of India

3 Business and Loan Growth The bank has 34% market share in home loans amongst the scheduled commercial banks and 20% when HFCs are included. The overseas book has declined on account of INR appreciation and because of USD 2 bn transfer pertaining to SBI UK. Xpress credit, under personal loan segment, is a very profitable segment for the bank. Most of the growth in corporate lending is coming from the government undertakings. Power sector growth too is mainly due to lending to government units in generation and transmission segments. 90% of the growth in road exposure is from the government sector. Growth in services sector exposure is mainly because of NBFCs. The bank classifies its NBFC exposure as central government based, institution based, large corporate house based and entrepreneur based. Entrepreneur NBFC exposure, which grew at 10%, is least preferred by the bank and would be dealt with by way of portfolio buyouts. Margin, Liabilities and Liquidity Savings deposits, which increased by nearly Rs. 1 trn, were mostly bulk deposits. However, these have been garnered at the retail card rate. The bank has a 415 mn customer base on the savings front. As stock of NPAs decline, the bank expects spread to improve. As per the bank, 3% is a fair estimate for global NIMs while domestic NIMs would be higher than 3%, going forward, in FY20. The bank says it been able to push up margins on high quality corporate accounts as well as government accounts. The bank expects to see CA traction improve in next 6 month to 1 year. Operating Expenses Employee costs for the quarter were impacted on account of incremental provisioning worth Rs. 15 bn for terminal/retirement benefits. Provisions were also higher on account of wage revisions. Overheads, other than employee costs, have been under control. Business acquisition and development (DSAs, BC channel) and card promotion charges have been on the higher side though, for 9MFY19. Bank expects YONO, the bank s digital offering, to offer a comprehensive suite of products to retail as well as corporate customers in another 2 years. This offering is expected to bring down distribution costs and ultimately the cost/income ratio. Current customer base of YONO is over 6 mn. Fee and Other Income Fee income has seen good traction across most segments. The bank reduced account maintenance charges last April which has impacted fee income to an extent (Rs. 17 bn impact for 9MFY19). LC/BG income now gets amortized and the accounting was effected from April 2017 onwards. Capital Adequacy Subsidiaries CET1 ratio does not include profit for 9MFY19. Bank raised tier 2 bonds during the quarter worth Rs bn. As per the bank, SBI Cards & Payments has been valued at ~Rs. 60 bn. 3 State Bank of India

4 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Oct-17 Feb-18 Jun-18 Oct-18 Feb-19 Exhibit 1: Financial summary Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Net interest income 618, , , ,363 1,068,050 Pre-provisioning operating profit 508, , , , ,045 PAT 104,841 (65,475) 92, , ,447 EPS (Rs) 13.1 (7.3) BV (Rs) P/E 16.7 (29.9) P/BV Gross NPAs (%) Net NPAs (%) RoA (%) 0.4 (0.2) RoE (%) 6.3 (3.2) Source: Company, Nirmal Bang Research Exhibit 2: Actual performance versus our estimates (Rsmn) 3QFY19 3QFY18 2QFY19 YoY (%) QoQ (%) 3QFY19E Devi. (%) Net interest income 226, , , , Pre-provisioning operating profit 126, , , ,903 (13.5) PAT 39,548-24,164 9,449 (263.7) , Source: Company, Nirmal Bang Research Exhibit 3: Change in our estimates Revised estimate Earlier estimate % Revision FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E Net interest income (Rsmn) 868, ,363 1,068, , ,363 1,068, NIM (%) bps 0 bps 0 bps Operating profit (Rsmn) 620, , , , , , Profit after tax (Rsmn) 92, , ,447 92, , , Source: Company, Nirmal Bang Research Exhibit 4: One-year forward P/BV (x) Source: Company, Nirmal Bang Research P/BVPS Mean +1 SD -1 SD -2 SD 4 State Bank of India

5 Financial statements Exhibit 5: Income statement Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Interest income 1,755,182 2,204,993 2,550,254 2,780,352 3,139,268 Interest expenses 1,136,585 1,456,456 1,681,811 1,844,990 2,071,218 Net interest income 618, , , ,363 1,068,050 Fee income 162, , , , ,859 Other income 191, , , , ,385 Net revenues 973,206 1,194,544 1,275,650 1,420,940 1,630,295 Operating expenses 464, , , , ,249 -Employee expenses 264, , , , ,673 -Other expenses 199, , , , ,576 Pre-provisioning operating profit 508, , , , ,045 Provisions 359, , , , ,853 -Loan loss provision 329, , , , ,704 -Investment depreciation 2,984 80, ,416 5,063 5,098 -Other provisions 27,887 (44,226) 8,164 11,168 19,051 PBT 148,552 (155,282) 140, , ,192 Tax 43,711 (89,808) 47, , ,745 PAT 104,841 (65,475) 92, , ,447 Source: Company, Nirmal Bang Research Exhibit 7: Balance sheet Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Equity capital 7,973 8,925 9,247 9,247 9,247 Reserves & surplus 1,874,887 2,182,361 2,374,653 2,638,975 2,976,836 Shareholders funds 1,882,860 2,191,286 2,383,900 2,648,222 2,986,083 Deposits 20,447,514 27,063,433 29,723,893 32,945,469 36,914,450 -Current deposits 1,524,211 1,901,739 2,080,673 2,306,183 2,657,840 -Saving deposits 7,589,614 10,137,745 11,295,079 12,684,005 14,396,635 -Term deposit 11,333,689 15,023,949 16,348,141 17,955,280 19,859,974 Borrowings 3,176,937 3,621,421 2,589,511 3,361,868 4,260,701 Other liabilities 1,552,352 1,671,381 1,827,329 1,846,523 1,841,030 Total liabilities 27,059,662 34,547,520 36,524,633 40,802,082 46,002,264 Cash/equivalent 1,719,716 1,918,986 2,469,875 2,766,260 3,131,406 Advances 15,710,780 19,348,802 21,477,170 24,054,431 27,229,615 Investments 7,659,896 10,609,867 9,640,737 10,750,856 12,087,654 Fixed assets 429, , , , ,297 Other assets 1,540,080 2,269,942 2,496,936 2,746,630 3,021,293 Total assets 27,059,662 34,547,520 36,524,633 40,802,082 46,002,264 Source: Company, Nirmal Bang Research Exhibit 6: Key ratios Y/E March FY17 FY18 FY19E FY20E FY21E Growth (%) NII growth 8.2 N.A Pre-provision profit growth 17.5 N.A PAT growth 5.4 N.A. N.A Business (%) Deposits growth 18.1 N.A Advances growth 7.3 N.A Business growth 13.2 N.A Credit deposit CASA deposit Operating efficiency (%) Cost-to-income Cost-to-assets Productivity (Rsmn) Business per branch 1, , , , ,836.5 Business per employee Profit per branch 5.8 (2.9) Profit per employee 0.5 (0.2) Spread (%) Yield on advances Yield on investments Cost of deposits Yield on assets Cost of funds NIM Capital adequacy (%) Tier I Tier II Total CAR Asset quality (%) Gross NPAs Net NPAs Specific provision coverage Provision coverage (incl w/off) Slippage Credit costs Return (%) RoE 6.3 (3.2) RoA 0.4 (0.2) RoRWA 0.7 (0.4) Per share EPS 13.1 (7.3) BV ABV Valuation (x) P/E 16.7 (29.9) P/BV P/ABV Source: Company, Nirmal Bang Research 5 State Bank of India

6 Apr-14 Jun-14 Aug-14 Oct-14 Jan-15 Mar-15 May-15 Aug-15 Oct-15 Dec-15 Mar-16 May-16 Jul-16 Sep-16 Dec-16 Feb-17 Apr-17 Jul-17 Sep-17 Nov-17 Jan-18 Apr-18 Jun-18 Aug-18 Nov-18 Jan-19 Rating track Date Rating Market price (Rs) Target price (Rs) 14 August 2014 Buy 2,418 2,915 8 October 2014 Buy 2,411 2, November 2014 Buy 2,785 3, December 2014 Buy January 2015 Buy February 2015 Buy May 2015 Buy August 2015 Buy November 2015 Buy February 2016 Buy May 2016 Buy August 2016 Buy November 2016 Buy February 2017 Buy February 2017 Buy May 2017 Buy August 2017 Buy November 2017 Buy February 2018 Buy May 2018 Buy August 2018 Buy October 2018 Buy November 2018 Buy December 2018 Buy February 2019 Buy Rating track graph Not Covered Covered 6 State Bank of India

7 DISCLOSURES This Report is published by Nirmal Bang Equities Private Limited (hereinafter referred to as NBEPL ) for private circulation. NBEPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 2014 having Registration no. INH NBEPL is also a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments. NBEPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. NBEPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in securities Market. NBEPL, its associates or analyst or his relatives do not hold any financial interest in the subject company. NBEPL or its associates or Analyst do not have any conflict or material conflict of interest at the time of publication of the research report with the subject company. NBEPL or its associates or Analyst or his relatives do not hold beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of this research report. NBEPL or its associates / analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. NBEPL or its associates have not received any compensation or other benefits from the company covered by Analyst or third party in connection with the research report. Analyst has not served as an officer, director or employee of Subject Company and NBEPL / analyst has not been engaged in market making activity of the subject company. Analyst Certification: I, Shivaji Thapliyal and Raghav Garg, the research analyst is the authors of this report, hereby certifies that the views expressed in this research report accurately reflects my personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research report and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. 7 State Bank of India

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