In little more than a month, SBIN has corrected by 20%+. At 1x consol P/B (Sep'19E) & 0.74x core-bank P/B (Sep'19E), valuations are below historical average and attractive. While the macro looks fairly weak, we expect SBIN to grow its market share but perhaps at lower net interest margin and fee, but may see some up tick in its credit costs.
Our FY20E EPS is well above consensus (factoring IBC recovery of ~ Rs 15,000 crore). Retain ‘buy’ with price target of Rs 370. We forecast a much shallower improvement trajectory owing to the tussle in transmitting the repo rate cuts while still maintaining some floor to what the bank pays to the saver (savings/time-deposits).
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Although in the last 3 months SBIN has cut its one-year MCLR by 20 bps, it has lowered its time-deposit rates in the 60 days to 5-year bucket by 40 bps; on avg, we believe near-term adjustment in cost of funds may take a while. We forecast full year FY20E NIM to improve only 8 bps over FY19 to 2.88%, progressing to 3% by FY22E. SBIN's cost of deposits was 5.07% in Q1FY20, lowest among banks.
On the 7.5% of Gross NPLs, approx. 35% of these are admitted under IBC while another 6% are filed but yet to be admitted, with these buckets carrying 81% and 45% provisions, respectively. Within these, three accounts are nearing a resolution with expected recovery of 50% on claims (or 62% on NPLs), or roughly about `15,000 crore pre-tax, based on our estimate of claims filed with NCLT and approx. bids placed.
Gross NPL were 7.5% (flat q-o-q) with overall provision cover (incl. written off) inching up to 79.3%. Slippage in the quarter (Rs 17,000 crore) were 3.6% (as % of trailing 12m loan), of which Rs 2,000 crore were from a SOE entity whereas another Rs 2,000 crore of agri loan slipped from one state. SMA-1 & 2 (> Rs 50 mn) and other large ticket earmarked stressed assets stood at Rs 248.03 bn. Net stressed assets stood at 4.7% (vs 3.9% QoQ). However, with weak macro, we have increased our credit cost estimate by ~20 bps for FY20E to 1.3% vs 1.1% earlier.