SBI: Asset quality to improve further in FY16

Street expects gross NPAs and net NPAs to increase by FY17

Investors have largely remained negative on public sector banks due to capital constraints and asset quality issues. While State Bank of India (SBI), the largest public sector bank, is relatively better placed than some of its capital-starved peers, the Street has not been favourably disposed towards it. After much criticism from stakeholders, the government has indicated it would infuse $3 billion in FY16 and another $6 billion in FY17. With the government changing its stance on recapitalisation of public sector banks, SBI could well be a beneficiary of such a move.

Other than the government’s recapitalisation move, SBI has shown improvement in its asset quality, too, in FY15. Gross non-performing loans have declined from five per cent in FY14 to 4.3 per cent in FY15 as fresh slippages remained flat year-on-year, while net NPAs declined 20 basis points year-on-year to 2.8 per cent. On the downside, SBI’s restructured book has grown 170 basis points to 8.3 per cent of loans. Analysts believe the bank is focused on improving its balance sheet as there is focus on improving costs. The bank’s cost-to-income ratio has improved 130 basis points in FY15 with operating costs growing at the slowest pace since 2009, says Kotak Institutional Equities.

SBI is among the few public sector banks that is well capitalised with capital adequacy ratio at 12 per cent and Tier-I capital of 9.6 per cent. Analysts believe SBI is the only public sector bank that can survive the current economic conditions. The bank has consciously grown advances by 7.5 per cent in FY15 as it is concentrating on cleaning up its books. In FY16, loan growth will be driven by the SME and retail segments. Even as corporate loan growth is expected to grow in low single digits, Karvy Stock Broking expects advances to grow 13 per cent a year over FY15-17. The Street also expects asset quality to improve further in FY16. Gross NPAs are expected to improve to 3.7 per cent, while net NPAs could improve to 1.7 per cent by FY17 from 4.3 per cent and 2.1 per cent in FY15.



The bank continues to be a preferred play for investors, especially after the recent correction. Kotak Institutional Equities is valuing the bank at 1.9 times (adjusted for NPLs and subsidiaries) or 1.6 times book value (without adjustments to net NPLs) for RoEs in the range of 12-15 per cent and estimates earnings growth at 20 per cent CAGR for FY15-18. The brokerage has a 12-month target price of Rs 320.