State Bank of India – Annual Report Update (Deposit share improves further; Retail loans grow 15% YoY)

SBIN’s Annual Report reaffirms our view that the bank is progressing well in its goal to deliver robust return ratios, although COVID-19 has cast uncertainty on the earnings trajectory. SBI is focused on building a granular and high-quality Retail portfolio.

–       ~39% of corporate loans are toward PSUs or govt. undertakings; ~61% of the Retail portfolio comprises home loans, while >95% of unsecured credit is offered to govt./PSU employees. SBI remains a deposit machine, and despite sharply cutting SA/TD rates, has further improved its deposit market share by 46bp to 22.8%.

–       On a segmental basis, Retail PBT grew 42% YoY despite a modest 8% YoY revenue increase, while loss in the Corporate segment narrowed sharply.

–       Around 21.8% of customers have availed the benefit of moratorium, amounting to INR5.6t (23% in value terms), which is better than that for most peers.

–       On the digitalization front, the YONO platform set a new record with ~46m+ downloads and ~21m+ registered users. SBIN has further guided to double the user base in the next six months. The bank has 13.4% market share in POS terminals, 29.4% in debit card spend, and 23.2% in mobile banking, etc.

–       SBIN has demonstrated strong improvement in asset quality over the past two years, with the GNPA ratio declining to 6.1% from 10.9%, and fresh slippages moderating sharply to 2.2% in FY20, lower v/s many private peers. SBIN has prudently improved PCR, while the proportion of the moratorium book also stands lower than that of peers. We maintain BUY, with TP of INR280 (0.7x FY22E ABV).

Segmental profitability on improving trend; Retail PBT contributes 61%

Segmental profitability reflects Retail PBT grew 42% YoY, contributing ~61% to the total profits, despite revenue growth coming in at ~8% YoY. While Corporate revenues grew at 15% YoY, reported loss stood at INR40b. This is the fourth consecutive year the bank has reported loss in this segment; however, the quantum of loss declined sharply by ~75% in FY20. In the Treasury segment, the bank reported PBT of INR157b (led by gains from the stake sales of SBI Life and SBI Cards), which contributed ~53% to the total segmental profits.

Retail remains key growth driver; digital prowess driving results

SBIN’s focus has been on building a granular and high-quality portfolio, with Retail being a key growth driver. Home loans / Xpress credit grew at ~14% YoY/35% YoY. The increase in Xpress credit was driven by YONO. The home loans / Xpress credit portfolio constitutes ~80% of the total Retail portfolio. On the Corporate side, ~77% of the loans are A & above rated. In terms of risk profile, ~39% of corporate loans are toward PSUs / govt. undertakings; ~61% of the Retail portfolio consists of home loans, and >95% of unsecured retail credit is offered to govt./PSU employees.

Deposit share increases to 22.8%; CASA ratio stands healthy at ~45%

SBIN continues to witness strong growth in deposits and has succeeded in maintaining a robust liability franchise, with the market share in deposits improved by 46bp to 22.8%. Domestic deposit growth came in strong at 11% YoY, and overseas deposits grew at 20% YoY. Furthermore, retail CASA grew at 10.8% YoY to INR10.2t and stood at 48.3%, with the bank’s overall CASA ratio at 45.2%. SBIN opens ~70k savings accounts per day. Its strong CASA franchise and recent SA/TD rate cuts would help offset the margin pressure arising from the sharp cut in repo rates.

Lower moratorium book provides comfort; slippage ratio beats ratios of many private banks

Around 21.8% of the bank’s customers have availed moratorium, amounting to INR5.6t (23% in value terms), which is better than that for most peers. Furthermore, accounts for which the asset classification benefit has been availed stand at INR62.6b, on which the bank holds a provision of INR11.7b (~15%). Over the past two years, SBIN has reduced its GNPAs to INR1.5t (6.1%) from INR2.2t (10.9%), aided by higher recovery, led by select large NCLT resolutions; on the other hand, slippages have increased, led by one large HFC, energy accounts, and agri slippages. Nevertheless, the slippage ratio moderated significantly to 2.2% and stands lower than even the ratios of many private banks. Furthermore, provision coverage improved to 65.2% (83.6% incl. tech. w/off) from 50.4% (66.2% incl. tech. w/off) in FY18.

Share of ‘Loss and Doubtful 3’ NPLs increases ~4x over past two years; NCLT emerges as largest recovery channel

The mix of Loss and D-3 assets combined increased to ~37% v/s ~10% in FY18. This indicates the diminishing requirement of aging provisions and higher recovery prospects from fully-provided/written-off accounts. Furthermore, of the total recoveries of ~INR178b in FY20, recoveries from NCLT stood the highest at ~35%.

Building strong digital prowess; market share improves across

SBIN has garnered major market share across multiple digital channels, such as 13.4% in POS terminals, 29.4% in debit card spend, and 23.2% in mobile banking. SBI is also the second largest credit card issuer in the country after HDFCB, with a customer base of over 10m. Furthermore, the YONO platform set a new record with ~46+m downloads and ~21+m registered users, and the bank has further guided for the YONO user base doubling over the next six months.

Subs getting bigger and better; strong performance over FY20

SBI’s subsidiaries – SBI MF, SBI Life Insurance, and SBI Cards – have displayed robust performances and gained scale and market share in their respective segments. SBIN monetized its stakes in various subs, such as the Insurance and Cards businesses, raising ~INR138b over FY17–20.

–       SBI Cards: This has a market share of 18.2% on a card base of 10.5m and 17.9% share in card spend. It witnessed a 42% CAGR in card spend over FY17–20, while PAT CAGR over the similar period was 47%. Return ratios remain healthy, with RoE at 27.4% as of FY20 as the company created INR4.9b worth of COVID-19 provisions.

–       SBI Life Insurance: A 25% CAGR was witnessed in un-weighted NBP over FY15–20 (v/s 18% for private players), with a VNB margin of 18.7% as of FY20. It has one of the lowest cost structures, with a total expense ratio of 9.9%, enabling it to deliver operating RoEV of 20.5% (v/s 17.3% last year).

–       SBI Asset Management: This is the largest AMC, with total AUM of ~INR3.7t, with market share of ~13.8%. AUM increased at robust CAGR of 38% over FY15–20 to INR3.7t in FY20 from INR749b in FY15. PAT over the same period witnessed a 30% CAGR to INR6.0b in FY20, with RoE of 30.4%.

–       SBI General Insurance: In FY20, gross written premiums grew 45%; thus, market share improved to 3.59% in FY20 from 2.77% in FY19. Overall, PAT grew 23% YoY to INR4.1b in FY20, from INR3.3b in FY19, with RoE of 20.4%.Valuation and viewSBIN reported a decent performance in a very challenging environment. The slippage ratio has moderated in the last few years and stands lower than even the ratios of many private banks, while higher recoveries have aided improvement in asset quality ratios. SBIN has prudently improved PCR over the last few years and has one of the lowest stressed assets among corporate banks. The proportion of the moratorium book also stands lower v/s most peers, aided by higher exposure to salaried (government and PSU) employees. This would enable the bank to maintain strong control over credit cost as the COVID-19 impact becomes visible in 2HFY21. However, we build a slight moderation in margins/fee income, and higher credit cost and project RoA/RoE of 0.5%/9.6% by FY22. Maintain BUY, with unchanged TP of INR280 (0.7x FY22E ABV). Thank You.