Pick Of the Week – State Bank of India
Every week, we recommend a well-researched fundamental equity investment as our ‘Pick of the Week’. Handpicked after a thorough analysis of the business, industry, and economy, this recommendation has a higher potential of earning good returns over a horizon of 6 - 9 months.
Investment Rationale
Comfort on asset quality increasing: With resolutions beginning to pick, State Bank of India (SBI) remains a key beneficiary. Management expects some more resolutions in Q4FY20, and HFC account likely to be resolved by H1FY21. In Q3FY20, out of the fresh slippages of Rs 16,525 cr (Rs 8,800 cr in Q2FY20), the domestic corporate and international loan book contributed Rs 11,200 cr, mostly from a stressed HFC exposure. SBI reported GNPA of 6.94%, a level it last reported in Q1FY17. Standard exposure to vulnerable sectors remains a source of potential stress. However, we expect the extent of incremental stress to be considerably lower than before. Overall comfort on asset quality is increasing every quarter, which should reflect in improving return ratios
Operational improvement on track: Higher provisions for legacy stress coupled with slow credit growth impacted operational performance in the past. With expected resolution, high PCR (64%) and moderate credit growth, the bank’s operational performance is set to improve. We expect a reduction in Loan Loss Provisions (LLP) and hence improvement in RoAEs. Subsidiaries' performances have also been improving. SBI Cards IPO is expected in Q4FY20. Stake sale in SBI Cards would support near-term earnings trajectory. Gradual pick-up in credit off-take coupled with healthy operational matrix and lower slippages augur well for future earnings
Deposit traction improves: In Q3FY20, Deposit growth increased to 10% YoY vs. 8% in Q2FY20. This was led by an increase in term deposit growth to 11/3% as CASA deposits grew ~8/1%. Overall, CASA formed 44.7% of the total deposits (45.2% last year). The uptick in deposit growth is positive after sluggish growth in the trailing 5 quarters
* Note: Stock Investment horizon approx. 6-9 months. CMP as on 14th February, 2020.
Please refer the research report disclaimer before making an investment decision.
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