SBI's earnings growth may taper off in the near-term, warn analysts

State Bank of India (SBI) stock outlook: Analysts at Nomura termed SBI's sharp NIM decline "disappointing" as the lender's YoY NIM expansion of 31bp significantly trailed private banks.

State Bank of India’s earnings growth may turn lacklustre in the near-term, warn analysts. This, they said, could be due to margin compression and likely lower fee income over the next one year.

"While the cost of deposits is repricing sharply across the system, there will be relatively lower yield expansion going ahead as most of the back-book has been repriced and there is a high competitive pressure on yields. We believe it will be difficult for SBI to prevent net interest margin (NIM) compression," said analysts at HSBC while downgrading the stock to ‘Hold’ from ‘Buy’.

They further said that in an environment, where NIM and operating costs are under pressure, fee income becomes an important lever. "However, SBI's fee/assets remain low at 48bp (annualised) in the quarter. Given that credit costs will likely normalise, we believe earnings growth will likely remain lacklustre for SBI over FY24-25," they added.

State Bank of India’s April-June quarter (Q1FY24) earnings were a mixed bag as its net interest income (NII) declined 4 per cent quarter-on-quarter (QoQ), led by a sharp 27bp QoQ decline in NIM to 3.33 per cent.

Net profit was up 178 per cent year-on-year (YoY) at Rs 16,880 crore. The bank reported treasury gains of Rs 3,850 crore, while core fees grew 4 per cent YoY to Rs 6,600 crore.

Slippages increased to around Rs 7,900 crore in a seasonally weak quarter though the gross non-performing asset (GNPA) and NNPA ratios stood stable.

The restructured book declined to Rs 22,700 crore (0.7 per cent of advances), while the special mention account (SMA) 1/2 portfolio increased to Rs 7,220 crore (22bp of loans).

At the bourses, shares of India's most profitable company have declined 3 per cent in the past three days as against 0.8 per cent rise in the benchmark S&P BSE Sensex.

Analysts at Nomura termed SBI’s sharp NIM decline “disappointing” as the lender’s YoY NIM expansion of 31bp significantly trailed private banks.

"SBI's core fee performance continues to be soft, and coupled with softer NIMs, is resulting in a drag on operating profitability. We think levers to improve core pre-provision operating profit (PPoP) may be limited going ahead,\" they added.

SBI’s core fees grew at a compounded annual growth rate (CAGR) of 3 per cent over FY18-24. Moreover, core fee-to-assets ratio has come down considerably from 1.1 per cent in FY18 to 0.7 per cent in FY23. Nomura expects it to be 0.6-0.7 per cent over FY24-26.

The brokerage has cut its core PPoP estimates for FY24-26 by 5 per cent to 5.5 per cent, while net profit estimate has been increased by 0.3 per cent for FY24, but cut by 2.2 per cent/2.3 per cent for FY25/FY26. It has also slashed NII estimates by around 3 per cent each for FY24-26.

"We believe any incremental re-rating for SBI (from current 1x forward P/B for core banking business) will require outperformance on core PPoP, which will be challenging," Nomura said.

Loan growth snarls

SBI’s domestic gross advances grew 1.6 per cent QoQ and 15.1 per cent YoY. However, overseas gross advances witnessed 1.9 per cent QoQ decline and YoY growth moderated sharply to 7.4 per cent YoY (vs 19-20 per cent run-rate). Thus, overall gross advances growth was contained at 1.1 per cent QoQ and 13.9 per cent YoY.

SBI’s loan growth has moderated from 20 per cent in Q2FY23 to 14 per cent, reflecting slower rise in large corporate and international segments.

"While the management targets a 15-per cent loan growth in FY24, we are factoring a 13 per cent CAGR in loans over FY23-25 as sustained corporate growth is imperative to achieve 15 per cent overall growth. Further, we are factoring a 5bps decline in overall FY24 NIM to 2.94 per cent," said Prabhudas Lilladher.

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HSBC, too, has cut NIM estimates to average 3.21 per cent (from 3.33 per cent) over FY24-26. “We also marginally reduce our FY24 credit costs estimates to 45bp from 50bp earlier, resulting in 6.8 per cent/4.1 per cent/2.6 per cent cuts in our EPS estimates for FY24/25/26, respectively,” it said.