Relief to SBI on the cards; investors should await clarity on asset quality

Relaxation in the two segments is positive of asset quality recovery, but investors should await clarity from post-results commentary

State Bank of India’s (SBI’s) size, as well as diversity of exposure, hasn’t been of much help to investors during the slump. This reflects in the near-50 per cent fall in market cap over the past three months.

The Street, too, has been fast to de-rate the stock, with stress building in the 18.5-per-cent exposure to the two troubled pockets (MSMEs and NBFCs).

With Wednesday’s rescue measures, however, the recovery in asset quality for SBI may not come to a jolting halt. While NBFCs may gain from the liquidity measures — which would help them meet repayment obligations due in the next 3 months — the relief package will bring a more pronounced comfort for MSMEs.

Analysts at Edelweiss say SBI, which is also their top pick, may be the clear winner from Wednesday’s move, given the risk-aversion to other public sector banks. Further, compared to peers, the improvement in book value as a result of relief to the MSMEs could be as high as 11.5 per cent for SBI, followed by 7 per cent for Axis Bank.

Analysts are reversing a few conservative estimates, following the new measures.

 

 

In terms of stress assessment, too, SBI fares a tad better than Axis Bank, with 17 per cent of its loan book categorised as stressed (exposure to MSME and BB-rated corporate book). The number, however, stands at 18 per cent for Axis Bank.

Quantified at 5.4 per cent of the total banking credit, lending to MSMEs had been an important source of credit growth for banks, until early 2020. “If no policy aid was provided, then the moderate financial leverage, high operating leverage (from an operational standstill), and frozen receivables would have all ensured a mass extinction event (with over 20 per cent of defaults) in mid-sized Indian businesses,” say analysts at Edelweiss.

Even though analysts remain confident, investors should await clarity on asset quality. Thursday’s announcement on agri loan subventions could once again have a negative impact on credit behaviour of customers, putting further stress on SBI’s agri portfolio.

The March quarter results, due in a few days, along with management commentary, will be critical to judge banks’ asset quality trajectory.

Until then, UBS’ view of national service risk (interest holidays and bailouts) rising for the sector in general and SBI in particular, may hold true.