SBI: Will it continue to remain cheap??

From the Desk of DreamLadder: June 07, 2020

SBI’s stock price spiked post Q4FY20 results on back of strong reported PAT growth. We believe, operationally it was a weak quarter for SBI, as strong looking bottom-line growth has been masked by the gains from stake sale in SBI card business (one-off item). However, its asset quality has seen continuous improvement since Q1FY18, positive for the stock. Amongst PSU players, SBI is the best bank to play for improvement in corporate asset quality cycle.

Often people start looking at banking stocks like any other stock from other businesses.


But there is a big difference!!!

 

Imagine you are a cigarette manufacturer say ITC and you sold a packet of cigarette to some buyer and got the money in exchange. Here transaction is complete – you got the money and buyer got the cigarette. It will not matter to you whether buyer is dead or alive, post this transaction. However, as a banker you will always be concerned about the survival of your borrower. Therefore, one should always focus on the quality of balance sheet rather than P&L, as banks/lending financial institutions are balance sheet businesses and not P&L businesses.

Headline no is below expectations:

Net Interest Income (difference between interest earned and interest expense) which is like topline for any bank fell 0.8% YoY. Partly it can be explained by the falling interest rate environment, as interest repricing on loan book happens faster while liability repricing always happens with a lag (your FD rate will change only when it will come for renewal).

 

Interest expense during Q4FY20 remained at ~Rs.40,000 cr, similar to Q3FY20, while interest income declined by Rs.5,000 cr, during the same period. Interest income was impacted by lower loan growth (only 6% vs. 11% in deposit growth) as well as interest reversal on NPA in Agri segment. As a result, yield on loan & other assets fell ~20bps during Q4 while cost on loan borrowed fell by hardly 3bps during the same period. This resulted into decline in NIM and domestic NIM fell by ~65bps during 4Q vis-à-vis 3Q. We see limited scope for NIM expansion in near term, as bank has limited room to cut the cost of funds.

 

As we have pointed earlier, PAT looks stronger Rs.3581 cr in Q4FY20 as against Rs.838 cr in Q4FY19, largely on back of Rs.2731 cr gain from stake sale in SBI cards, while loan loss provisions did not go up like several other banks have done during this quarter. So, we need to look at this number with a pinch of salt.

Asset quality improvement continues, +ve for the sentiments:

On the other hand, SBI has done well on asset quality front and therefore could see some improvement in the overall sentiments.

1) GNPA/NNPA are down from the peak of 10%/6% in Q1FY18 to 6.2%/2.2% now (Q4FY20). Even sequentially decline is sharp – 70bps/50bps during Q4.


2) SBI has strong pipeline of cases pending in the IBC from sectors like Steel, power and Telecom. Bank has taken enough haircut on the several of these accounts and resolution through IBC could bump-up the earnings in future.


3) Provision coverage ratio at 83-84% (including write-offs) is one of the best in the industry.


4) Slippage on full year is comparable to other leading banks… SBI at 2.5% of loan book, which is similar to HDFC/ICICI of the world. Even if we add Rs.6200 of slippage coming out of the moratorium book, FY20 slippage ratio stands at 3.6%, much better than several of its peers.


5) Moratorium at 22-23% of term loans is similar to some of the better rated private banks like HDFC or ICICI. Similarly, its working capital exposure under moratorium is like the above names. similar to other large banks.


6) Exposure to SMA-I & II has also seen decline – Rs.7,266 cr which was ~Rs.18,300 only 2 quarters back.

We foresee lower asset quality vulnerability for SBI, due to its strategy of increased focus on top-rated corporates (>77% loans to “A and above” rated corporate), lower SME book (~11%) and largely retail exposure to salaried class especially unsecured retail loans (>95% of PL to govt/PSU employees).

SBI has corrected in recent times and is down 35% in last 3 months and 44% YTD. It trades at very cheap valuation (0.3x FY22 consensus adjusted book value) after stripping the value of other businesses. 

Even if we assign holding company discount of say 20%, value of its subsidiary comes at Rs.105-120. At current market price, core business is getting the valuation of Rs.80-85, which implies 0.30-0.35x FY22 BV. Although its return ratios are depressed with RoA at 0.6-0.7% and RoE at 10-11% for FY21/22 consensus estimates, we are getting the largest bank with 21-22% of market share with strong liability franchise (CASA at 45%)

As we expect more NPA resolution through IBC framework, SBI is best placed amongst the PSU pack to play for improvement in corporate asset quality cycle.


SOTP Valuation Bank’s Stake Value/Share
SBI Life 58.0% Rs.60-70
SBI MF 63.0% Rs.15-20
Yes Bank 48.0% Rs.19-20
Stake in NSE/UTI MF 8%/17% Rs.5
SBI Caps/SBI DFHI 100%/72% Rs.5
Others   Rs.30-40
Value of Subsidiaries  Rs.130-150 
Stadalone Business 0.75-0.80x FY22 BV  Rs.200 
Total Value    Rs.340-350 

Source: NSE, DreamLadder Capital Research


Disclaimer: The views expressed here are based solely on information available publicly/internal data/other reliable sources believed to be true. Facts presented have been verified, however, the same may contain human errors/ errors from database. The information is provided merely as a complementary service and do not constitute an offer, solicitation for the purchase or sale of any financial instruments, inducement, promise, guarantee, warranty, or as an official confirmation of any transactions or contract of any kind