Expect loan book growth of 9.5% in FY22E – SBIN

Update on the Indian Equity Market:

On Monday, NIFTY closed in the green at 18,003 (+1.1%). Among the sectoral indices, PSU BANK (+3.2%), MEDIA (+2.6%), and REALTY (+1.2%) closed higher while none closed in the red. Among stocks, UPL (+4.6%), HEROMOTOCO (+3.3%), and TITAN (+3.1%) were the top gainers while WIPRO (-2.3%), NESTLEIND (-1.0%), and DIVISLAB (-0.9%) were among the top losers.

Excerpts from an interview of Mr. Ashwani Bhatia, MD, State Bank of India (SBIN) with CNBC-TV18 dated 7^th January 2022:

• The management stated that a big part of the stress in the banking system, which mostly consists of the corporate sector, has been reduced and that they are not witnessing any further tension.
• RBI in their financial stability report talked about some stress buildup on account of COVID, looking at the trajectory of the virus at the moment. But as an industry, the management thinks that things are pretty much in place for decent growth.
• Management is optimistic about the growth pipeline, the majority of which is expected to result from increased government activity. The national monetization strategy has already taken off, and InvITs are receiving favorable coverage. According to management, more economic activity would benefit the industry. Management expects the loan book to grow at 9.5 percent in FY22E and 7-9 percent in the next 5 years.
• Mr. Bhatia stated that the retail sector was never a concern. The retail book is generally small ticket, and the housing sector is by far the most important for all banks. In general, delinquencies in the housing industry are quite low. On the personal loan side, some evaluation is done at the backend because the clients are primarily salaried persons or government employees; hence, management anticipates this stress to be managed under 0.5 percent for FY22E.
• Despite the fact that the RBI has emphasized the stress that the MSME sector is under, as well as the significance of closely monitoring these problematic loans, SBI management, in particular, feels that things cannot get much worse. Today, all public sector banks are well-capitalized, and their high net worth is sufficient to handle loan expansion in the next few years. The bank’s NPA levels are quite constant, and the operating profit and provisions are also adequate.
• Reliance Industries raised about $400 mn, the biggest issue by any Indian business done overseas, with one of the main reasons being the cheaper cost of financing as opposed to borrowing from a bank. On the subject of whether the trend may lead to a loss of market share for banks, management stated that it is a very beneficial development since it helps local institutions de-risk. Well-managed businesses are gaining access to international funding. After factoring in the hedging cost, the LIBOR, and the spread, the resulting rate would be close to the domestic rate. However, many of the enterprises do not need to hedge since they have a large export book. As a result, the cost of funding is significantly reduced.

Asset Multiplier comments:

• The asset quality forecast appears to be positive since the worst phase of the corporate cycle appears to be behind the industry. Despite the tough circumstances, it reported good FY21 results. We anticipate that robust loan and deposit growth, as well as continuing recovery, will maintain the earnings momentum.
• We believe the bank is well-positioned to deliver strong advances and PAT growth on the back of strong retail franchise and recovery in the asset quality, particularly the corporate book. We expect the bank to benefit from economic recovery and recovery of the benign corporate credit cycle.

Consensus Estimate: (Source: Market screener website and Tikr)

• The closing price of SBI was ₹ 504 as of 10-January-2022. It traded at 1.6x/1.4x/1.3x the consensus Book Value per share estimate of ₹ 300/ 340 / 388 / for FY22E/FY23E/FY24E respectively.
• The consensus average target price is ₹ 625 /- which implies a PB per share multiple of 1.6x on FY24E BVPS of ₹ 388/-.

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