State Bank of India (SBI) gained over five per cent on Wednesday to Rs 267 levels on the NSE despite the bank positing a huge Rs 77 billion loss in the March 2018 quarter. The rally, over the past two sessions, comes on the back of expectations of an improvement in the asset quality going ahead.
Most brokerages have revised their rating on the stock post the results in a hope that the non-performing asset (NPA) cycle may be turning around. This is the second consecutive quarter that SBI has reported a loss.
“Markets appeared to be impressed by the SBI results for two reasons. Firstly, there is the first indication that the NPA cycle may be turning around and combined with growth in advances, this could result in improved profitability in the coming quarters. Secondly, the NCLT resolution will result in a write-back of close to Rs.1 trillion for Indian banks and SBI is likely to be the biggest beneficiary,” says Aikishan J Parmar, an analyst tracking the banking sector at Angel Broking.
Here is a quick compilation of how brokerages have interpreted the numbers.
Kotak Institutional Equities
A disappointing 3QFY18 performance and the recent RBI circular, which removed all dispensations, have resulted in the recent underperformance. High slippages and a bleak outlook were expected. Losses were high as dispensations were not fully availed and the bank chose to maintain its coverage ratio.
However, with 1.3% of loans pending in the watchlist and bulk of the stress reported as NPLs with healthy coverage, we see the focus shifting to outcomes on NCLT cases. SBI, in our view, is well-placed to benefit from an NPL resolution cycle—a key driver for a stock re-rating. We maintain BUY rating with a target price of Rs 370 (from Rs 380).
SBI is relatively better positioned among peers. With 36% of the industry under potential PCA framework and stress recognition done, we believe SBI will see strong earnings momentum henceforth with major delta coming from reduced credit cost. Furthermore, we believe, focus on creating value in its non-banking subsidiaries can be a more stable and scalable vector for overall value. The stock trades at 0.7x FY20E P/BV, which renders risk-reward favourable. Hence, maintain ‘BUY’.
Q4FY18 slippages were mainly from corporate book with one‐third slippage from power sector which was in the stressed pool. Also bank saw one telecom a/c slip to NPA which was not in the stressed pool or dispensations but has created a provision of +50%. The revised watch list of Rs 258 billion remains one‐third dominated by power (two large a/c) and rest in steel / roads / textiles.
Bank’s stressed asset pool is now 1.3% of loans (down from 2.8% in Q3) and some large recoveries from NCLT a/c will help improve asset quality but keep provisioning high based on ageing leading to improving provision coverage ratio (PCR). Retain BUY with revised target price of Rs 349 based on 1.5x Mar‐20 adjusted book value (ABV) & sum-of-the-parts (SOTP).
Q4’18 results saw the bank recognize a substantial part of its stressed asset portfolio turn NPA. Resultant, the pace of new NPA addition is set to moderate; larger focus shifts towards recovery / resolution of NCLT cases. We have tweaked our FY19E /FY20E estimates accordingly. We continue to like SBI for its improved operational performance and contained asset quality. Retain Buy, with a SOTP-based target at Rs330. Key risks: Lower than expected loan growth / longer than expected time towards resolution.