State Bank of India Rating: buy: Focus on NIMs, slippages dragged growth

For Q1FY22, SBI reported profit of Rs 65 bn, 55% y-o-y, led by other income & tad lower provision. Slippages at 2.8% of past loans were above expectations, but c.30% was recovered in July & we see scope for upgrades in Q2-Q3. Despite stronger Casa, SBI has lagged on loan growth (6%) due to quest for NIMs & asset quality that limited growth in corp. & SME loans. We see that priority staying, hence growth may lag. Still, SBI stays among key picks with Buy rating.

Slippages higher than expected: SBI reported higher than expected slippages of Rs 163 bn (2.8% of past year loans on annualised basis), led mainly by higher stress in SME (40% of slippages) and retail loans (30% of slippages). GNPA edged higher 34bps q-o-q to 5.3% in Q1FY22 and restructured book was 0.9% of loans. Encouragingly, management clarified that almost 30% of that (Rs 48 bn) was recovered in July. Collection efficiency has also improved to 93.5% in July (92% in June).

Despite building in additional buffer provision, credit costs dipped to 1.6% (1.8% in Q4). Overall buffer provision is limited at around 0.6% of loans. We have raised our credit cost estimates marginally to factor in the Covid 2.0 impact, but expect trends from Q2 onwards to move towards normalised levels.

Focus on margins and asset quality drags growth: Gross loans grew 6% y-o-y and NII growth was 7% even after adjusting for interest reversal. While SBI has a strong deposit franchise (Casa ratio at 46% and low funding costs) and growth in retail loan book has been strong (16% y/y in Q1), its cautious approach towards stressed SME segment (2% y/y in Q1) and its preference to preserve margins should constrain growth in corporate loans (down 2% y/y). We thus expect loan growth to see only a marginal improvement towards 9% CAGR over FY21-24e, lower than key private bank peers.

Some pressure on NIMs, fees affected by lockdowns: Reported NIM was 2.92% in Q1 (2.9% in Q4), but adjusting for interest reversal of `8 bn in Q1FY22, underlying margins fell to 3% in Q1 vs. 3.2% in Q4FY21. Fee income dipped 36% q-o-q, but gains from sale of investment boosted other income. Operating costs moderated vs. elevated Q4FY21 levels, resulting in better than expected PPOP.

Subsidiaries also impacted by Covid: SBI Life profit fell 23% y-o-y due to upfronting of Covid claims in Q1, but growth was healthy. At SBI Cards, profits fell 23% to `3.1 bn due to higher provision, but ROE (19% in Q1) and rebound in transactions was encouraging. SBI Funds saw strong 30% y-o-y growth in Q1FY22.

Trim estimates: We trim our FY22-23 EPS by 4% as we incorporate marginally lower NII and provision estimates. We reiterate Buy with a rolled-forward TP of `550 (`520 earlier) based on 1.3x June-23 adjusted PB.