State Bank of India is firing on all cylinders. Buy for Target Price of Rs 805: ICICI Securities

Firing on all cylinders, RoAs cross 1% mark; sustenance to drive further rerating

State Bank of India’s (SBI) Q2FY23 earnings surpassed expectations by a wide margin and beat was across operating metrics crossing 1% RoA and 17% RoE mark. PAT of Rs132.6bn, ahead of I-Sec (Rs106bn) and consensus (~Rs100bn) estimates, was supported by:

i) NIMs soaring 30bps QoQ led by repricing benefit and contained deposit cost,

ii) net advances growth of 21% YoY/5% QoQ,

iii) slippages at mere 33bps, credit cost of <50bps, net NPAs now at 0.8% with 78% coverage, iv) treasury gains of Rs4.6bn against a loss of Rs65bn QoQ provided further incremental delta. We expect NIM trajectory to sustain with repricing of lending book offsetting any deposit cost rise. Credit growth of 18% / 16%, stable NIMs, operating profit growth of 22% / 19% and credit cost of 0.8% / 0.9% will drive RoE to 18%/ 17% by FY23E/FY24E, respectively. This will help SBI command 1.7x FY24E core banking business book (earlier 1.5x Sep’23E). We revise our SoTP based target price to Rs805 (earlier: Rs673). Maintain BUY. Key risks: I) Equity raise to boost CET (at 9.5%) may dilute interim RoEs; II) competitive pressure and deposit acceleration may weigh on NIM expansion. - NIMs soar 30bps QoQ and NII was up 12.8% QoQ (much ahead of expectations): Domestic NIMs were up 32bps QoQ to 3.55% as yields expanded >45bps to 7.9% and cost of deposits was up mere 8bps to 3.88%. Overseas business NIMs were up 24bps QoQ to 1.56% and overall NIMs, thereby, was up 30bps QoQ to 3.32%. Net interest income was up 12.8% QoQ as well as YoY to Rs352bn against our expectations of Rs344bn. It was also supported by C/D ratio expansion of 85bps QoQ to 70.4%. Nearly 41% of SBI’s lending portfolio is linked to MCLR, 34% is EBLR linked, 21% is fixed rate and rest is BPLR, base rate etc. Bulk of the MCLR-linked portfolio is with 6-month reset. Also, within EBLR-linked book, 11% is T-bill linked that reprices with a quarter lag. Given this profile, while partial benefit of rate transmission was reflected in Q2FY23, the entire benefit should be visible in H2FY23. This repricing is likely to more than offset any deposit cost pressure and NIMs should further widen. Also, SBI has Rs3.5trn liquidity lying in treasury which is due for redemption in H1FY23 and can be utilised for advances growth. On a steady-state basis, we expect margins (calculated) to stabilise around 3.0% in FY23E-FY24E.