Buy State Bank of India; target of Rs 363: KR Choksey

KR Choksey's research report on State Bank of India

SBI reported net loss of INR 77 bn during Q4FY18 vs. a loss of INR 34 bn during Q4FY17, primarily driven by high provisioning. At INR 281 bn, provisioning is up 34.2% yoy / 48.8% qoq, translating into credit costs of 3.8% versus 3% for Q4FY17 and 2.6% for Q3FY18. Asset quality saw deterioration with >60% corporate slippages from the identified stress baggage which stands at INR 258 bn (down from >INR 500 bn in Q3). GNPAs at 10.91% are up 56 bps qoq while NNPAs at 5.73% are up 12 bps qoq. Part of the higher provisioning has gone towards scaling up the PCR to >50% (+179 bps qoq). The bank is aiming for 60% PCR by FY19 (we are building in 65% by FY20). At INR 330 bn worth of slippages during the quarter, slippage ratio works out to be 6.9% (4.9% for FY18). However, with most of the stress now being recognized and classified at NPA, the management has guided for gross slippages of 2% over FY19/20. Power sector continues to be the major pain point for the bank, comprising of 41% of the current watch list. On the growth front, advances grew by 4% to INR 19348 bn. Going forward, the management has guided for 12% annual growth 9we are building in 11% average annual growth over FY19/20) and RoA of 0.9-1% on back of reducing credit costs and improvement in income metrics (NIMs + non-interest revenue).

Outlook

We value the standalone banking entity at INR 265 per share based on 1.5x FY20E P/ABV and add INR 85 per share for the subs, arriving at a target price of INR 363 per share. We maintain BUY.