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SBI reports highest every quarterly profit in Q3: What should investors do now?

State Bank of India expects better profitability in Q4 as well, led by better asset-quality trend, one-off gains from SBI Cards and lower tax.

February 01, 2020 / 09:57 AM IST
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The country's major lender State Bank of India on January 31 reported its historically highest ever quarterly profit of Rs 5,583.4 crore (up 41 percent YoY) in Q3FY20, backed by better margins, lower provisions and major recovery from one of its bad accounts (Essar Steel).

Brokerages maintained their bullish stance on the stock and majority of them expect the stock to return more than 30 percent in next one year period, following strong outlook from the management.

"Key positive was fresh slippages (excluding the housing finance company account) were quite lower, while SMA book came off & progressive resolutions on stress seems to leading to some optimistic visibility on asset quality," said Prabhudas Lilladher which retained buy call on the stock with revised target of Rs 419 (from Rs 413) based on 1.3x core Sep-21 ABV and Rs 118 for subsidiaries.

The brokerage feels going ahead, loan growth improvement, NIMs & credit cost trends will drive return ratios with much better position on both strong PCR & Tier-I capital. "We have slightly tweaked loan growth lower, adjusted NIMs and factored in stake sale gains from SBI Cards (adjusted in SOTP as well)."

State Bank of India expects better profitability in Q4 as well, led by better asset-quality trend, one-off gains from SBI Cards and lower tax.



Motilal Oswal also maintained its buy rating on the stock with a target of Rs 425 as it believes that SBI has prudently improved provision coverage ratio (PCR) over the last few years, and has one of the lowest stressed assets amongst corporate banks, which will drive a sharp decline in credit cost to 1.3/1.1 percent by FY21/22.

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"Also, further NCLT write-backs/subsidiaries monetization will boost earnings. We fine tune earnings and estimate PAT of Rs 31,900/41,800 crore in FY21/22," the brokerage said.

SBI reported a strong operating performance in a tough quarter, led by NCLT recoveries, improving fee income trends and controlled operating expenses.

Net interest income during the quarter grew by 22.42 percent year-on-year to Rs 27,778.8 crore, with loan growth of 7.4 percent YoY. Domestic net interest margin (NIM) improved to 3.59 percent in Q3FY20, registering an increase of 62 bps YoY and 37 bps sequentially.

As expected, asset quality improved as the Q3 saw a convergence of lumpy corporate NPAs (gross slippages at Rs 20,100 crore including DHFL - Rs 7,000 crore) and resolution (Essar Steel) leading to reduction in gross NPA ratio to 6.94 percent for the seventh quarter in a row. However, GNPA ratio for Card company increased QoQ to 2.7 percent from 2.3 percent in Q2.

Net NPA declined 14bps QoQ to 2.65 percent in the quarter ended December 2019.

Corporate SMA 1/2 book now stands lower at Rs 8,100 crore versus Rs 18,300 crore in Q2. The bank expects OTS in 2 power accounts of Rs 3,200 crore (Jindal India Thermal/Coastal energy) and restructuring of 4 accounts of Rs 7,090 crore with a PCR of 78 percent.

Slippages came in at elevated levels (led by stressed HFC account) but were under control in the overall corporate portfolio. Also, management guided for moderation in NPL formation, while recovery is likely to remain strong.

"We believe that an improving asset-quality outlook and better operating metrics in the PSU bank space are positives," said Sharekhan which maintained buy rating on the stock with a revised target price of Rs 415.

Emkay also maintained buy/overweight stance in Emkay Alpha Portfolio with a revised targetof Rs 380 (earlier Rs 350), given its strong liability profile, higher retail orientation, reasonable capital position and better return ratios among PSBs. "Accelerating power NPA resolutions and Cards IPO will be near-term positives for the stock."

Recovery and upgrades during the quarter were Rs 13,553 crore (including big amount from Essar Steel), against Rs 3,931 crore in previous quarter, the bank said in its BSE filing.

Provisions for bad loans fell sharply by 25.8 percent sequentially (down 41.4 percent YoY) to Rs 8,193.06 crore.

Provisions and contingencies dropped 44.80 percent sequentially to Rs 7,253 crore, but the same increased 20.76 percent compared to year-ago period.

Provision coverage ratio improved to 81.73 percent at the end of December quarter, against 81.2 percent in September ended quarter.

Disclaimer: The above report is compiled from information available on public platforms. advises users to check with certified experts before taking any investment decisions.
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first published: Feb 1, 2020 09:57 am
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