SBI reports lower NPAs, but Q4 profit misses estimates; what should investors do?

Brokerages retain bullish stance on the stock expecting 20-49 percent potential upside from current levels

June 08, 2020 / 08:15 AM IST
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The country's largest lender State Bank of India (SBI) has seen a 0.8 percent year-on-year decline in net interest income due to interest reversals on agri slippages and slower loan growth. The profit growth at more than four-fold increase to Rs 3,580.81 crore was supported by stake sale in SBI Card (Rs 2,731.34 crore) but was lower than analysts estimates.

Higher loan loss provisions, employee costs and slower NIM growth dented the profit.

Asset quality performance of the bank improved sequentially with 42 basis points decline in gross non-performing assets and 79 bps fall in net NPAs. Fresh slippages plunged 51 percent QoQ to Rs 8,105 crore in Q4FY20 - at four-quarter low, they were supported by the RBI dispensation.

Slippages ratio for Q4FY20 has declined to 1.41 percent from 2.94 percent as of Q3FY20 while the provision coverage ratio (PCR) has improved to 83.62 percent in March quarter, up 189 bps sequentially.

Prabhudas Lilladher believes slippages should be manageable with similar rate in FY21/FY22 which were estimating pre-COVID to trend down significantly. Bank disclosed 22 percent of its customers are under moratorium who have paid less than two installments and did not disclose value wise, hence is not comparable with peer banks.

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"Colour on moratorium seems little comforting as customers continue to pay installments (7 percent of customer paid atleast one installment and only 9 percent customers did not pay any installment), while 20 percent of working capital loans have chosen to differ interest payment which would keep slippage manageable, it feels.

Hence, brokerages retained bullish stance on the stock expecting 20-49 percent potential upside from current levels. The share price reacted positively to the earnings, rising 7.9 percent on June 5 to Rs 187.80 following asset quality performance, though earnings missed analysts expectations.

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"SBI has reported a decent operating performance in a very challenging environment. Slippages stood at a four-quarter low, aided by the RBI dispensation, resulting in improved asset quality ratios. We believe SBI has prudently improved PCR over the last few years and has one of the lowest stressed assets among the corporate banks," Motilal Oswal said.

The brokerage further said the proportion of the moratorium book also stands lower than most peers, aided by higher exposure to salaried (government and PSU) employees. "This would enable it to maintain strong control over credit cost as the impact of COVID-19 becomes visible in second half of FY21."

Motilal Oswal cut its earnings estimates for FY21/FY22 by 17/16 percent as it built-in a slight moderation in margins / fee income and higher credit cost and project return on asset (RoA)/return on equity (RoE) of 0.5/9.5 percent by FY22, but maintained buy call on the stock with a target of Rs 280, implying 49 percent potential upside from current levels.

SBI's non-interest income in Q4FY20 increased 5.2 percent to Rs 13,346.11 crore compared to year-ago quarter, as fee income (which contributed 59 percent) declined 8.34 percent YoY to Rs 7,873 crore. Pre-provision operating profit (PPoP) during the quarter fell 7.1 percent to Rs 15,733.78 crore YoY due to increase in employee cost.

Emkay Global also likes SBI among public sector banks given its strong liability profile, higher retail orientation and reasonable capital position, while valuations (0.3x FY22E core ABV) also look attractive.

Hence, the brokerage retained its buy rating on the stock with a revised target of Rs 225 (implying 20 percent potential upside).

Asset-quality momentum and MD transition remain key monitorables, said Emkay which expects RoA/RoEs to dip to 0.2/4 percent in FY21, but to gradually improve back to 0.5/10 percent in FY23.

Prabhudas Lilladher said undemanding valuation kept its buy rating intact with a revised price target of Rs 254 (from Rs 317 earlier), implying 35 percent potential upside. The brokerage feels earnings will be weak in FY21 and sees a recovery in FY22 but asset quality uncertainty will remain in FY21/FY22.

"We take comfort from strong deposit franchise, PCR of 65 percent (corporate book 73 percent) and CET-I sustaining at around 10 percent with some help from stake sales," it said.

Dolat Capital also feels valuations are comforting led by bank's formidable liability franchise and healthy subsidiaries. Hence, it maintained buy rating with a target of Rs 235, implying 25 percent potential upside.

But, "with limited earning cushion (PPoP/assets at 1.7 percent), weaker outlook on recovery/fee income, along with limited provision buffers, we don’t rule out likelihood of additional capital requirements," said the brokerage.

However, ICICI Securities downgraded the stock to hold from buy as COVID-19 provisions and stress of future along with hangover of Yes Bank would keep the stock performance muted. "We expect return ratios of RoA at 0.5 percent and 9.1 percent RoE by FY22.

The stock lost 48 percent year-to-date (2020) and 41 percent in March quarter, while it plunged 50 percent of its value in last one year.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Jun 8, 2020 08:15 am

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