State Bank of India Rating – Buy: Banks are very competitive

SBI has reported strong credit growth, healthy NIM, continuous improvement in NPAs and credit costs in Q4FY22. In an environment of increasing rates, and when deposit competition is likely to increase dramatically, SBINK is enviably placed with a strong deposit franchise, very low credit-to-deposit ratio (61.6% domestic, 67.5% overall) and low cost of funds. . It is also a valuer for most products like home loan, LAP, corporate loan, SME etc. With an optimal asset quality cycle, it is ideally set up to drive healthy growth of debt, maintain NIM and recover its RoA /. RoE 0.8% / 14% of FY24e.

We lower our TP to Rs. 600 (from Rs. 650) to reflect the subsidiary valuation as well as the pressure on the multiples assigned to the core bank. Among our favorite picks in space; Maintain a buy rating. Negative Risk: Delayed debt growth and pressure on fee income which affects PPOP.

We slightly modify our FY23 / 24 EPS; Introduce FY25 Estimation: We slightly cut our NIM Estimation which leads to an average 5% cut in NII for FY23 / 24e. However, we do estimate operating costs that offset this pressure. We estimate PPOP CAGR 16% and average PPOP RoA 1.7% FY22-25e. We maintain our credit cost estimates (0.9% on average in FY22-25e) which leads 18% above FY22-25e to 14% of EPS CAGR / FY23-25e.

Q4FY22 Key Observations of Income
Debt growth driven by domestic corporate (+ 11% qoq) and retail debt (+ 5% qoq) has risen to 11.6% yoy / 5.8% qoq. SME loans (+ 10% yoy, -1% qoq) lagged behind 8-10% qoq growth distributed by older peers.

Core-fee earnings fell 5% yoy, including pressure across various lines. This is a matter of concern and can be interpreted as the cost that SBIN is paying for growth. Decreased stress assets (5.6% debt vs. 6.3% in Q3) led to moderation in credit costs.

Highlights from the commentary: Management indicates that utilization is improving in both working capital and term loans and may result in strong growth in commercial debt. Given the high share of floating rate loans, the bank can be well positioned to maintain its margins at current levels. Even in the case of restructured / ECLGS loans, the quality of assets is doing well. Management calls for normalization of a credit cost in the near term. The bank is experiencing strong customer attraction through its YONO application and will launch YONO 2.0 with enhanced digital offer, better user experience and security.