(SBIN IN) Rating: BUY CMP: Rs295 TP: Rs355 November 5, 2018 Q2FY19 Result Update Change in Estimates Target Reco Change in Estimates Current Previous FY19E FY20E FY19E FY20E Rating BUY BUY Target Price 355 349 NII (Rs. m) 851,458 949,913 899,133 975,996 % Chng. (5.3) (2.7) Op. Profit (Rs. m) 550,139 625,504 628,539 654,891 % Chng. (12.5) (4.5) EPS (Rs.) 1.7 16.2 8.8 20.6 % Chng. (80.1) (21.1) Key Financials FY18 FY19E FY20E FY21E NII (Rs bn) 749 851 949 1,067 Op. Profit (Rs bn) 595 550 626 718 PAT (Rs bn) (65) 16 145 220 EPS (Rs.) (7.3) 1.7 16.2 24.7 Gr. (%) 229.3 (123.8) 832.3 52.0 DPS (Rs.) 0.5-2.5 3.0 Yield (%) 0.2-0.8 1.0 NIM (%) 2.4 2.6 2.7 2.8 RoAE (%) (3.0) 0.7 6.4 9.1 RoAA (%) (0.2) 0.0 0.4 0.5 P/BV (x) 1.3 1.3 1.2 1.1 P/ABV (x) 2.3 1.9 1.6 1.4 PE (x) (40.2) 169.2 18.2 11.9 CAR (%) 12.6 12.6 12.1 11.7 Key Data SBI.BO SBIN IN 52-W High / Low Rs.347 / Rs.232 Sensex / Nifty 34,951 / 10,524 Market Cap Rs.2,632bn/ $ 36,024m Shares Outstanding 8,925m 3M Avg. Daily Value Rs.16313.51m Shareholding Pattern (%) Promoter s 58.51 Foreign 10.21 Domestic Institution 23.74 Public & Others 7.54 Promoter Pledge (Rs bn) Stock Performance (%) 1M 6M 12M Absolute 14.2 21.9 (9.2) Relative 12.3 21.8 (12.5) Pritesh Bumb priteshbumb@plindia.com 91-22-66322232 Asset quality improving but operations yet to catch up Quick Pointers Slippages of Rs108.8bn was much lower than anticipated helping asset quality Operationally was weak due to lower fees and higher opex SBI reported PAT of Rs9.4bn (PLe: Rs9.7bn) which was marginally below our estimates with lower provisioning was offset by much lower other income despite having gains of Rs15.0bn from stake sale in subs. NII was up 12% YoY and flattish QoQ adjusting to one-off from large interest recovery in NCLT a/c in Q1FY19. Slippages have been coming down for SBI and all corporate banks and with NCLT showcasing resolutions with bank having good PCR we expect decent delta from lowered credit cost but challenges on core NIM improvement remains and fee income has to improve to see core profitability improve materially. We retain BUY with revised TP of Rs355 (from 348) based on 1.4x Sep-20 ABV & SOTP of Rs84 from subs. Top line should have been better; opex to normalized from Q4FY19: NII grew by 12.5% YoY on better loan growth, but NIMs at 2.73% (adjusting to one-off in Q1FY19 at 2.6%) did not see strong benefit as incremental loan growth came from corporate loans (AAA rated & PSUs) and lowering C-D ratio at 70%. Also fee income de-grew by 6% YoY, while bank lacked material treasury gains despite booking Rs15.0bn of stake sale gains from Subs which impacted topline growth. Bank sees tail wind on NIMs from NCLT recoveries, repricing of loans and improve C-D ratio and we build-in same for next four quarters. As wage hike provisions should be in base and gratuity provisioning should end in Q3FY19 end, opex should start normalizing adding to operating performance. Loan growth improved on large base: Improving loan growth on such large base has been surprising especially growing in corporate segment with growth of 14% YoY and steady retail loan growth of 14% YoY as well. Retail share in overall gross domestic book stood at 32.4%, while large & mid-corporate stood at 42%, which bank management expects to remain steady at. We have increased loan book assumptions to 8.5% YoY but is likely to be below 10-12% growth guidance for FY19. Lower slippages help asset quality: GNPA/NNPA came off by 70/50bps QoQ to 9.95%/4.84% in Q2FY19 as slippages came in lower at 108.8bn and Rs31.9bn from corporate and 74% from the existing watch list (now at 1.4% of loans). Bank undertook slightly higher write-off which helped asset quality but PCR (w/o technical w.off) was static at ~60%. Bank is likely to see large recovery from some of the accounts in NCLT, helping asset quality and lower incremental provisioning as PCR remains much adequate. But in our view, we are not foreseeing large provision write backs as bank may face stranded power into NCLT requiring higher provisions and normal ageing based provisions. November 5, 2018 1
NII grew by 12% on better loan growth but margins are not seeing gains yet Other income was disappointing on lower fee income and treasury gains, despite Rs15.0bn of gains on sale of investments Opex growth was slightly higher in staff on gratuity and wage provisions impact Lower NPA provisioning has helped overall provisioning and helping improve earnings Operating profit was mixed; asset quality was better (Rs m) Q2FY19 Q2FY18 YoY gr. (%) Q1FY19 QoQ gr. (%) Interest income 587,935 548,497 7.2 588,132 (0.0) Interest Expenses 378,878 362,638 4.5 370,148 2.4 Net interest income (NII) 209,057 185,859 12.5 217,984 (4.1) - Treasury income 13,280 85,660 (84.5) (12,640) (205.1) Other income 93,751 160,161 (41.5) 66,795 40.4 Total income 302,807 346,020 (12.5) 284,779 6.3 Operating expenses 163,759 146,028 12.1 165,047 (0.8) -Staff expenses 96,964 77,032 25.9 97,084 (0.1) -Other expenses 66,795 68,996 (3.2) 67,963 (1.7) Operating profit 139,049 199,991 (30.5) 119,731 16.1 Core operating profit 125,769 114,331 10.0 132,371 (5.0) Total provisions 120,922 191,374 (36.8) 192,283 (37.1) Profit before tax 18,127 8,617 110.4 (72,551) NA Tax 8,678 (7,198) NA (23,793) NA Profit after tax 9,449 15,816 (40.3) (48,759) NA Balance Sheet Loan growth improved led from domestic with both corporate and retail helping Margins saw small gains adjusting to one-off gains from interest recovery in Q1FY19 Asset quality improved on much lower slippages, while PCR remained steady as bank undertook higher write-offs Deposits 28,074,201 26,231,796 7.0 27,478,132 2.2 Advances 19,573,396 18,026,089 8.6 18,757,735 4.3 Ratios (%) RoaA 0.1 0.2 (9) (0.6) NA NIM 2.7 2.4 30 2.8 (7) Yield on Advances 8.4 8.5 (3) 8.6 (14) Asset Quality Gross NPL (Rs m) 2,058,641 1,861,146 10.6 2,128,399 (3.3) Net NPL (Rs m) 948,100 978,963 (3.2) 992,363 (4.5) Gross NPL ratio 10.0 9.8 12 10.7 (75) Net NPL ratio 4.8 5.4 (59) 5.3 (45) Coverage ratio 53.9 47.4 655 53.4 57 CASA mix was steady at 45% of domestic deposits Business & Other Ratios Low-cost deposit mix 45.3 44.9 42 45.1 23 Cost-income ratio 54.1 42.2 1,188 58.0 (388) Non int. inc / total income 31.0 46.3 (1,533) 23.5 751 Credit deposit ratio 69.7 68.7 100 68.3 146 CAR 12.6 13.6 (95) 12.8 (22) Tier-I 10.4 11.0 (60) 10.5 (17) November 5, 2018 2
22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% Loan growth improving on back of both corporate & retail 19.0% 17.5% 13.0% 15.7% 9.7% 2Q14 3Q14 7.3% 7.5% 10.5% 6.8% Advances growth YoY(%) 12.9% 10.7% 12.6% 7.2% 4.1% 7.3% 0.5% -0.1% 1.3% 3.5% 4.0% 8.6% Domestic loan growth grew by 7% YoY led by retail loans Loan break up (Rs bn) Q2FY19 Q2FY18 YoY gr. (%) Q1FY19 QoQ gr. (%) Gross Advances 20,692 18,924 9.3 19,902 4.0 Total Corporate and SME 10,110 9,043 11.8 9,762 3.6 Large Corporate 7,453 6,521 14.3 7,012 6.3 SME 2,909 2,919 (0.3) 2,667 9.1 Agri 1,907 1,912 (0.3) 1,881 1.4 International 2,909 2,919 (0.3) 2,667 9.1 Retail 5,766 5,048 14.2 5,591 3.1 Home 3,597 2,905 23.8 3,202 12.3 Auto 670 619 8.3 669 0.2 Other Retail 1,500 1,525 (1.6) 1,516 (1.1) Margins were slightly better post off setting one-off last quarter 3.9% 3.6% 3.3% 3.0% 2.7% 2.4% 2.1% NIM (%) Domestic NIM (%) 3.5% 3.5% 3.5%3.5% 3.5% 3.3%3.3% 3.2% 3.3% 3.0% 3.0% 3.2% 3.1% 3.1%3.1% 3.2% 2.9% 2.9% 3.0% 2.9% 3.0%3.0% 2.9% 3.0% 2.8% 2.5% 2.6% 2.6% 2.7% 2.8% 2.8%2.7% 2.7% 2.7% 2.4%2.4% 2.5%2.5% November 5, 2018 3
State Bank of India 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% Fee income de-grew Core fees growth YoY 47% 46% 45% 44% 43% 42% 41% 40% CASA mix has remained steady Low Cost deposits(%) Asset quality has improved on lower slippages and higher write-offs loans Gross slippages are normalizing with now 2% of 13% Gross NPA (%) Net NPA (%) 31% Gross Slippages (%), annualized 11% 26% 9% 21% 7% 16% 5% 11% 3% 6% 1% 1% Fresh accretion slowing down with stressed assets in under control. Figures Rs million Additions 107,970 118,520 103,570 103,680 300,590 106,270 267,800 328,210 143,490 108,880 Upgradation + Recovery 28,160 15,500 31,210 22,050 66,800 33,230 44,420 NA 148,560 43.270 Write offs 46,130 60,600 59,060 39,920 131,760 92,580 93,120 NA 100,800 135,380 Gross NPAs 1,105,430 1,057,850 1,081,723 1,123,430 1,778,660 1,861,146 1,991,413 2,234,260 2,128,390 2,058,641 Gross NPA Ratio 6.94% 7.14% 7.23% 6.90% 9.97% 9.83% 10.35% 10.91% 10.70% 9.95% Slippages (%) - annualized 2.95% 3.35% 2.89% 2.86% 6.43% 2.36% 5.94% 7.19% 2.97% 2.32% O/s Std Restructured 365,510 365,700 346,280 366340 393,370 340,240 208,840 NA NA NA Restructured (% of loans) 2.58% 2.55% 2.39% 2.33% 2.18% 1.89% 1.14% NA NA NA Watchlist 3,12,300 2,59,510 1,79,920 133,100 244,440 212,850 103,420 289,890 246,320 215,910 Watchlist (% of loans) 2.13% 1.75% 1.20% 0.85% 1.35% 1.18% 0.57% 1.42% 1.24% 1.04% Stressed assets (% of loans incl. watchlist) 11.7% 11.4% 10.8% 10.1% 13.5% 12.9% 12.1% 12.2% 11.9% 11.0% November 5, 2018 4
(Rs bn) Watch list has been coming off Textile Oil & Gas Iron & Steel Power Roads/EPC Chemicals Telecom Others SMA 1 & 2 350 312 300 290 260 244 246 250 213 180 200 216 150 133 103 100 50 0 Return ratios improvement will be gradual but higher delta from provisions RoAE decomposition (%) FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Net interest income 2.9 2.9 2.6 2.7 2.2 2.4 2.5 2.6 Treasury income 0.2 0.3 0.3 0.6 0.4 0.2 0.2 0.2 Other Inc. from operations 0.9 0.9 1.0 0.9 0.9 0.8 0.8 0.7 Total income 4.0 4.0 3.9 4.2 3.5 3.4 3.5 3.6 Employee expenses 1.3 1.2 1.1 1.2 1.0 1.1 1.1 1.1 Other operating expenses 0.8 0.8 0.8 0.9 0.8 0.8 0.8 0.8 Operating profit 1.9 2.0 2.0 2.1 1.8 1.5 1.6 1.7 Tax 0.3 0.3 0.2 0.0 (0.3) 0.0 0.2 0.3 Loan loss provisions 0.9 1.0 1.3 2.1 2.2 1.5 1.1 0.9 RoAA 0.6 0.7 0.5 (0.1) (0.2) 0.0 0.4 0.5 RoAE 10.0 10.6 7.3 (1.1) (3.5) 0.8 7.0 10.0 Source: Company Data, PL Research Change in estimates We adjust NIMs, lower other income on fees & treasury and slightly increase opex on wage & gratuity impact (Rs mn) Old Revised % Change FY19E FY20E FY19E FY20E FY19E FY20E Net interest income 899,133 975,996 851,458 949,313 (5.3) (2.7) Operating profit 628,539 654,891 550,139 625,504 (12.5) (4.5) Net profit 78,267 183,754 15,553 145,007 (80.1) (21.1) EPS (Rs) 8.8 20.6 1.7 16.2 (80.1) (21.1) ABVPS (Rs) 161 187 153 180 (4.9) (3.6) Price target (Rs) 349 355 1.7 Recommendation BUY BUY November 5, 2018 5
Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18 State Bank of India We revise our TP to Rs355 (from 348) based on Sep-20 ABV and SOTP (rolled from Mar-20 ABV) PT calculation and upside Terminal growth 5.0% Market risk premium 6.0% Risk-free rate 8.0% Adjusted beta 1.05 Cost of equity 14.3% Fair price - P/ABV 271 Value of subs/associates 84 Fair value of consol. entity 355 P/ABV Standalone bank 1.4 P/E - Standalone bank 13.2 Current price, Rs 285 Upside (%) 24% Dividend Yield (%) 1% Total Return 25% SBIN s: SOTP valuation table SOTP valuation, FY19E Stake (%) Revised PT Method Standalone 100 271 Avg. of P/ABV 1.6x Life insurance venture 62% 50 2.8x EV; 21x new biz multiple Asset management 74% 9 5% of AUMs Capital Market/DFHI/Others 100% 24 P/E model Total 355 SBIN - one year forward P/ABV trends P/ABV (x) 3 yr avg. avg. + 1 SD avg. - 1 SD 2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 November 5, 2018 6
Income Statement (Rs. m) Int. Earned from Adv. 1,413,632 1,543,091 1,752,428 2,002,492 Int. Earned from invt. 703,376 769,660 796,483 841,391 Others 65,485 45,325 53,228 53,961 Total Interest Income 2,204,993 2,379,888 2,624,427 2,921,674 Interest Expenses 1,456,450 1,528,429 1,675,114 1,855,099 Net Interest Income 748,543 851,458 949,313 1,066,575 Growth(%) 1.4 1.9 9.5 10.8 Non Interest Income 446,010 365,728 384,015 410,896 Net Total Income 1,194,553 1,217,186 1,333,328 1,477,471 Growth(%) (0.6) 3.6 9.6 10.8 Employee Expenses 331,787 391,508 411,084 439,860 Other Expenses 253,875 261,491 282,411 305,004 Operating Expenses 599,435 667,048 707,824 759,479 Operating Profit 595,119 550,139 625,504 717,992 Growth(%) 0.1 (7.6) 13.7 14.8 NPA Provision 706,800 433,679 352,690 354,099 Total Provisions 750,380 527,097 410,679 391,421 PBT (155,262) 23,041 214,825 326,571 Tax Provision (89,808) 7,488 69,818 106,136 Effective tax rate (%) 57.8 32.5 32.5 32.5 PAT (65,454) 15,553 145,007 220,435 Growth(%) 262.4 (123.8) 832.3 52.0 Balance Sheet (Rs. m) Face value 1 1 1 1 No. of equity shares 8,925 8,925 8,925 8,925 Equity 8,925 8,925 8,925 8,925 Networth - - - - Growth(%) 3.5 0.7 5.4 8.1 Adj. Networth to NNPAs 1,108,547 797,666 611,812 508,827 Deposits 27,063,433 28,957,873 31,419,292 34,404,125 Growth(%) 4.7 7.0 8.5 9.5 CASA Deposits 11,872,940 12,683,548 13,824,489 15,172,219 % of total deposits 43.9 43.8 44.0 44.1 Total Liabilities 34,547,520 36,672,550 39,718,039 43,410,820 Net Advances 19,348,802 20,993,450 23,092,795 25,748,467 Growth(%) 3.5 8.5 10.0 11.5 Investments 10,609,867 10,850,227 11,362,211 11,944,607 Total Assets 34,547,520 36,672,550 39,718,039 43,410,820 Growth (%) 4.5 6.2 8.3 9.3 Asset Quality Gross NPAs (Rs m) 2,234,270 1,963,068 1,722,013 1,584,557 Net NPAs (Rs m) 1,108,547 797,666 611,812 508,827 Gr. NPAs to Gross Adv.(%) 11.5 9.4 7.5 6.2 Net NPAs to Net Adv. (%) 5.7 3.8 2.6 2.0 NPA Coverage % 50.4 59.4 64.5 67.9 Profitability (%) NIM 2.4 2.6 2.7 2.8 RoAA (0.2) 0.0 0.4 0.5 RoAE (3.0) 0.7 6.4 9.1 Tier I 10.4 9.8 9.5 9.3 CRAR 12.6 12.6 12.1 11.7 Source: Company Data, PL Research Quarterly Financials (Rs. m) Y/e Mar Q3FY18 Q4FY18 Q1FY19 Q2FY19 Interest Income 548,029 559,413 588,132 587,935 Interest Expenses 361,150 359,670 370,148 378,878 Net Interest Income 186,879 199,743 217,984 209,057 YoY growth (%) (4.8) (5.1) (0.8) 4.5 CEB 49,790 84,300 49,760 50,150 Treasury - - - - Non Interest Income 80,842 124,948 66,795 93,751 Total Income 628,871 684,361 654,927 681,685 Employee Expenses 84,968 92,542 97,084 96,964 Other expenses 65,203 73,317 67,963 66,795 Operating Expenses 150,171 165,859 165,047 163,759 Operating Profit 117,549 158,832 119,731 139,049 YoY growth (%) (18.4) (8.2) 0.8 (30.5) Core Operating Profits - - - - NPA Provision 177,597 240,801 130,379 101,845 Others Provisions 188,762 280,961 192,283 120,922 Total Provisions 188,762 280,961 192,283 120,922 Profit Before Tax (71,213) (122,129) (72,551) 18,127 Tax (47,053) (44,947) (23,793) 8,678 PAT (24,160) (77,182) (48,759) 9,449 YoY growth (%) (232.7) 124.3 (343.1) (40.2) Deposits 26,512,399 27,063,433 27,478,132 28,074,201 YoY growth (%) 1.9 4.7 5.6 7.0 Advances 18,262,119 19,348,802 18,757,735 19,573,396 YoY growth (%) (2.3) 3.5 4.0 8.6 Key Ratios CMP (Rs) 295 295 295 295 EPS (Rs) (7.3) 1.7 16.2 24.7 Book Value (Rs) 223 224 238 259 Adj. BV (70%)(Rs) 127 153 180 208 P/E (x) (40.2) 169.2 18.2 11.9 P/BV (x) 1.3 1.3 1.2 1.1 P/ABV (x) 2.3 1.9 1.6 1.4 DPS (Rs) 0.5-2.5 3.0 Dividend Payout Ratio (%) (6.5) - 15.4 12.1 Dividend Yield (%) 0.2-0.8 1.0 Efficiency Cost-Income Ratio (%) 50.2 54.8 53.1 51.4 C-D Ratio (%) 71.5 72.5 73.5 74.8 Business per Emp. (Rs m) 219 234 252 276 Profit per Emp. (Rs lacs) (3) 1 7 10 Business per Branch (Rs m) 2,687 2,876 3,120 3,424 Profit per Branch (Rs m) (4) 1 8 13 Du-Pont NII 2.39 2.59 2.70 2.78 Total Income 3.82 3.71 3.79 3.86 Operating Expenses 1.91 2.03 2.01 1.98 PPoP 1.90 1.67 1.78 1.87 Total provisions 2.40 1.60 1.17 1.02 RoAA (0.21) 0.05 0.41 0.58 RoAE (3.45) 0.78 7.03 9.95 Source: Company Data, PL Research November 5, 2018 7
Price Chart Recommendation History (Rs) 350 300 251 201 152 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18 Oct-18 No. Date Rating TP (Rs.) Share Price (Rs.) 1 11-Nov-17 BUY 386 333 2 17-Nov-17 BUY 386 333 3 13-Dec-17 BUY 386 313 4 10-Jan-18 BUY 386 304 5 9-Feb-18 BUY 350 296 6 12-Feb-18 BUY 350 296 7 15-Mar-18 BUY 350 254 8 20-Mar-18 BUY 341 248 9 13-Apr-18 BUY 321 261 10 22-May-18 BUY 349 254 Analyst Coverage Universe Sr. No. CompanyName Rating TP (Rs) Share Price (Rs) 1 Axis Bank Accumulate 681 611 2 Bank of Baroda BUY 161 110 3 Bank of India Reduce 89 79 4 Federal Bank BUY 102 82 5 HDFC Bank BUY 2,310 1,968 6 HDFC Standard Life Insurance Company BUY 500 359 7 ICICI Bank BUY 365 316 8 ICICI Prudential Life Insurance Company BUY 507 323 9 IDFC Bank Accumulate 55 37 10 IndusInd Bank BUY 2,000 1,627 11 Jammu & Kashmir Bank BUY 94 40 12 Kotak Mahindra Bank Hold 1,291 1,177 13 Max Financial Services BUY 700 359 14 Punjab National Bank Hold 79 65 15 SBI Life Insurance Company BUY 779 564 16 South Indian Bank BUY 22 15 17 State Bank of India BUY 349 271 18 Union Bank of India Reduce 79 68 19 YES Bank Accumulate 231 198 PL s Recommendation Nomenclature (Absolute Performance) Buy : > 15% Accumulate : 5% to 15% Hold : +5% to -5% Reduce : -5% to -15% Sell : < -15% Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly November 5, 2018 8
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