State Bank of India
2 December 2019
Update | Sector: Financials
TP: INR425 (+26%)
Earnings momentum to accelerate
Subs monetisation a big trigger
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
3021.4 / 42.2
374 / 244
Financials Snapshot (INR b)
FY19 FY20E FY21E
883.5 969.1 1,117.6
554.4 663.7 781.8
8.6 229.0 330.3
EPS Gr. (%)
169.6 206.6 247.8
Cons. BV (INR)
247.6 272.2 308.6
P/BV (x) (Cons.)
*Price adjusted for value of subs
Earnings recovery in sight; resolutions to support higher recoveries
State Bank of India (SBIN) has delivered 28% returns since our last
bank in Oct’19. There have been significant developments over the past two months
which have supported this performance: (i) Essar Steel resolution enabling
significant write-backs for banks, (ii) upcoming listing of its cards subsidiary at
proposed valuation of ~INR600b and (iii) easing of stress in the telecom sector, aided
by the recent tariff hikes and the government deferring payment of spectrum fees.
Although the macro environment remains challenging, net stressed loans for SBIN at
0.8% of loans are the lowest amongst peers. This, along with anticipated
provisioning write-backs, will enable normalization in credit cost, in our view.
We upgrade our FY20/21 earnings estimates by 15%/12% and project credit cost to
decline to 1.3% by FY21 (guidance: <1%). We thus estimate RoA/RoE to improve to
0.8%/14.1%. Maintain Buy with a revised target price of INR425 (1.3x FY21E ABV +
INR114 per share for subs). Subs accounts for ~34% of total valuation.
After reporting a sub-optimal performance over the last few years, SBIN appears
well positioned to report a strong uptick in earnings. With the overhang on Essar
resolution getting clear, recoveries for the bank are expected to be robust at
~INR120b (90% of exposure). This will enable it to further improve upon the PCR
and provide toward a few other residual stressed accounts. Even at the core
earnings level, we estimate SBIN to report a 19% CAGR in PPoP over FY19-21.
Net stressed loans (excl. NPA) at ~0.8% of total loans
Our deep-dive analysis on stressed accounts suggests that SBIN’s exposure to the
stressed pool stands at ~2% of total loans, which we believe is manageable.
However, according to SBIN’s disclosure on stressed accounts, net stressed loans
(excl. NNPA) at ~0.8% are lowest amongst corporate banks. We estimate
Shareholding pattern (%)
Sep-19 Jun-19 Sep-18
GNPL/NNPL ratio to decline to ~4.5%/1.6% by FY21 and PCR to improve to ~65%.
FII Includes depository receipts
Stock Performance (1-year)
Subs gaining remarkable scale; value unlocking to boost returns
SBI’s subs – SBI MF, SBI Life, SBI Cards and SBI Cap – have displayed a robust
performance over the last few years. The bank plans to monetize its subsidiaries,
which would lead to further value unlocking for stakeholders, in our view. At CMP,
subs account for ~34% of total valuation, while SBIN trades at a discount of 24% to
its six-year average (1.2x ABV) (refer page 7 for quick snapshot on subs).
St Bk of India
Sensex - Rebased
Valuation and view
SBIN has demonstrated a strong improvement in slippage trajectory and prudently
improved PCR over the past two years. The bank has one of the lowest net
stressed assets amongst corporate banks which will drive a sharp decline in credit
cost to 1.3% by FY21. Also, NCLT write-backs and subs monetization will further
boost earnings. At CMP, subs accounts for ~34% of total valuation, while the bank
trades at a discount of 24% to its six-year average (1.2x ABV). We estimate
RoA/RoE to improve to 0.8%/14.1% by FY21 though quarterly earnings may still
remain volatile. SBIN remains our top investment idea. Maintain
revised target price of INR425 (1.3x FY21E ABV + INR114 per share for subs).
Research Analyst: Nitin Aggarwal
(Nitin.Aggarwal@MotilalOswal.com); +91 22 6129 1542 |
(Parth.Gutka@motilaloswal.com); +91 22 6129 1567
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.