SBI’s analyst day focused on (a) strategy and earnings trajectory for the medium term; (b) resolution framework on stressed loans; (c) changes effected in the corporate loans and (4) its strengths on retail, liability franchise, digitization and its distribution network.

Key Insights:

  1. Management talked about the progress on ongoing resolutions and how the Stressed Assets Resolution Group (SARG) is helping the bank to maintain a healthy recovery run-rate.
  2. It expects the bank to deliver a return on assets (ROA) of 0.4%-0.5% in FY20 and 0.9%-1.0% in FY21, led by (a) credit growth of ~10%/12% with a net interest margin (NIM of) 3.15%-3.2%, translating into net interest income (NII) growth of 17%/14% for FY20/21, (b) non-interest income growth of 15% for both years with opex growth sustaining at <10%

Valuation and view:

Despite having similar prospects to ICICI Bank and Axis Bank in RoE recovery, SBI has seen negligible re-rating thus far. This is disappointing considering that SBI has also made broadly similar changes to its business model and continues to enjoy a solid liability franchise. On asset quality, there has been a reduction in gross NPL (20% in FY2020 and 6% in 1HFY20) and net NPLs (40% in FY2019 and ~10% in 1HFY20).

This is unlikely to change in FY2020-21 despite a few corporates/NBFCs coming under stress. The bank has laid out its exit strategies on a lot of its bad loans which appears to be quite credible.

The bank is well poised to show sharp improvement in return ratios by FY2021-22 on the back of recovery in loan growth, healthy operating profit growth and sharp reduction in credit costs.

A solid low cost franchise, ability to shift gears such as retail business, healthy capital adequacy ratios leading to lower risk of below book dilution, solid performance by subsidiaries and an inexpensive valuation could drive SBI's rerating in the market.

Disclaimer: The above report is compiled from information available on public platforms. inChat team advises users to check with certified experts before taking any investment decisions.

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