State Bank of India: New moats emerge as game changers. Buy for target price of Rs 790 (37% upside)

New moats emerge as game changers

While SBI always had the natural advantage of brand recognition and scale, the bank has gradually added other competitive moats in the form of a prolific sourcing edge, a YONO-powered digital stack, an unparalleled lean distribution model, and a potent combination of cross-sell focus and competencies. Although we argue that the Q1FY24 RoA (1.3%) and RoE (>20%) prints are exaggerated for regulatory forbearance (lower risk weights), lopsided pricing (lagged deposit repricing), and a benign credit cycle, we believe that the potent combination of traditional strengths and newly-added moats is reflecting in higher throughput, sustained efficiency gains (lean P&L), and high-quality new loan origination, translating into structurally lower credit costs and better return ratios. We raise our two-year explicit period forecasts by 6-8% each to factor in a superior asset profile and maintain BUY with a revised TP of INR790 (earlier INR750; standalone bank at 1.4x Mar-25 ABVPS).

► Prolific sourcing edge: Over the past five years, SBI has utilised its step-down subsidiary, SBI Securities, as an exclusive, open-market sourcing channel for home loans and auto loans. This channel now contributes ~1/4th of SBI’s home loan disbursements and ~87% of auto loan disbursements, translating into quicker turnaround, higher throughput and a variable P&L with commission expenses averaging <75bps (for the origination of auto loans and home loans). ► The YONO edge—a maturing digital stack: YONO, SBI’s flagship digital banking platform, has emerged as India’s largest neo-banking channel; to put this in context, as of FY23, YONO powers nearly two-thirds of the savings accounts opened by SBI and one-third of the retail asset accounts. ► Pre-approved rule engines power throughput gains: SBI has extensively deployed pre-approved offers to its ETB customers (~10% of the personal loan disbursements are pre-approved), trimming the turnaround time on retail loans considerably, driving 16-18% CAGR improvement in productivity metrics over the past few years. However, we flag caution on the bank oversimplifying underwriting protocols in search of productivity gains. ► NIM compression ahead as deposit repricing picks up: While the loandeposit ratio (at 73%) is comfortable to support SBI’s growth appetite, we believe that repricing of existing deposits is likely to pick up pace and exert pressure on near-term NIMs, albeit marginally better than our earlier forecast. ► Moderate upgrade; reiterate BUY: Although we argue that the Q1FY24 RoA (1.3%) and RoE (>20%) prints cannot be straight-lined, we believe SBI is on track to deliver a 1%+ RoA on the back of a healthy core operating profitability run rate, driven by stable NIMs (despite near-term pressure), and sustained productivity and efficiency gains.