Driven by strong treasury contribution of Rs 38 billion and well-controlled non-staff operating expenses, State Bank of India (SBI) has reported a higher than estimated Q1FY24 headline profit after tax (PAT) of Rs 168.8 billion, maintaining a stable return on assets (RoA) at 1.22% (compared to 1.23% q-o-q). However, the internal results were somewhat weak. The bank’s growth has slowed to 1.1% q-o-q. Furthermore, the global net interest margin (NIM) experienced a 27 bps q-o-q compression, standing at 3.33%, which was weaker even when adjusted for the lumpy interest on IT refund in the base quarter. Both gross and net slippages increased significantly on a q-o-q basis, mainly due to seasonality and the bank’s unique policy of recognising slippages.
Looking ahead, the bank has hinted at lower domestic NIMs y-o-y for FY24, although they remain confident about achieving around 15% y-o-y credit growth and anticipate improving slippages in the upcoming quarters.
Our estimation suggests that net slippages will remain at a comfortable level of 0.3-0.5% for FY24E and FY25E, resulting in favourable credit costs. Overall, we predict that the bank will deliver approximately 1.0% and 0.9% return on assets (RoA) and strong 17% and 16% return on equity (RoE) for FY24E and FY25E, respectively. Considering these factors, we maintain a Buy rating on the stock, with an unchanged target price of Rs 730 per share.
Domestic gross advances for SBI was reasonable at 1.6% q-o-q and 15.1% y-o-y. However, overseas gross advances witnessed 1.9% q-o-q decline and y-o-y growth moderated sharply to 7.4% y-o-y. Thus, overall gross advances growth was contained at 1.1% q-o-q and 13.9% y-o-y. Within domestic, growth was broad-based across verticals with SME book up 18.3% y-o-y and 3.0% q-o-q, retail book up 16.5% y-o-y and 2.1% q-o-q, agri book up 14.8% y-o-y and 2.1% q-o-q and corporate book up 12.4% y-o-y and 0.2% q-o-q. It is pertinent to note that SME growth has been in the range of 17-18% y-o-y for the last two quarters, suggesting improved execution of credit delivery. The bank mentioned calibrated growth approach in agri due to asset quality issues. Within retail, Xpress credit has seen some moderation in growth rate which was 19.8% y-o-y and 2.2% q-o-q. However, management ruled out any early signs of portfolio weakness and mentioned about improving growth during festive season. Overall, SBI has guided for 14-15% y-o-y credit growth in FY24.
Deposits, after a sharp 5% q-o-q rise in Q4FY23, were up 2% q-o-q and 12% y-o-y in Q1FY24. Gross slippages came in at Rs 79 billion, or 97bps annualised, well above Rs 35 billion q-o-q. However, this was well expected due to SBI’s unique slippages recognition policy. Recoveries and upgrades were also lower q-o-q and therefore net slippages jumped to Rs 43 billion. Write-offs stood at Rs 39 billion vs Rs 67 billion q-o-q. There is strong seasonality in first quarter slippages. We find similar (or higher) rise in gross/net slippages for Q1FY23 as well.
In Q1FY24, SBI’s CET-1 saw a fall of 8bps q-o-q to 10.19%, but is still up 47bps y-o-y. RWA density stands comfortable at 50.48% vs 50.96% y-o-y. YONO is expanding rapidly, aiding cross-sell and is envisaged as a separate distribution channel. The bank acquired 63% of savings accounts and 35% of retail asset accounts through YONO in Q1FY24.