Q2FY24 Review: State Bank of India: PPOP misses; lower provisions drive PAT beat

6 Nov 2023 , 02:30 PM

SBI’s Q2 PPOP was 9%/14% below IIFLe/consensus on higher opex, but negligible provisions drove 12%/7% PAT beat. Opex was up 20% QoQ as the bank increased its wage provisions to 14% from 10%. NII growth of 2% was better than expected as rise in yields largely offset the increase in CoF. Analysts of IIFL Capital Services expect NIMs to remain under pressure due to limited scope for the MCLR -led yield increase and residual funding cost increase ahead. Analysts of IIFL Capital Services take comfort of inexpensive valuations at 1.0x 1YF P/B, however with sticky cost-efficiency ratios and normalisation in credit costs, they expect ROAs to peak at 1% in FY24E, and thus see limited scope for re-rating. Retain ADD. 

Robust SME and retail led growth; NIMs hold-up. 

Advances grew 3% QoQ/ 12% YoY led by SME (5% QoQ) and retail loans, while corporate growth continued to be slower at just 7% YoY. Loan yields expanded 19 bps QoQ, but 23 bps decline in funding cost led to 4 bps of margin compression (better than expected). Analysts of IIFL Capital Services expect margins to remain under pressure as residual funding costs increase.

 Wage revision provisions to keep opex sticky; Asset quality remains benign. 

Bank revised its estimates of wage hike from 10% to 14% which led to a retrospective increase in wage provisions of Rs34bn provided in Q2. The quarterly run-rate of provisions too shall increase from current Rs15bn to Rs24bn per analysts of IIFL Capital Services calculation, hence they expect cost ratios to remain elevated. Stressed assets declined by 30bps as slippages moderated and recoveries/upgrades remained healthy. Bank also reversed standard asset provisions as it sees risk receding in these accounts, leading to negligible provisions. 

Retain ADD with a TP of Rs640.

Analysts of IIFL Capital Services revise their estimates downwards by 4-6% for FY25-26 factoring higher employee costs. Bank is trading at inexpensive valuations, however they see limited scope of re-rerating in the backdrop of plateauing profitability and hence retain ADD valuing the bank at 1.0x Sep’25 ABV and subs at Rs165/share.