NEW DELHI: Broking firm Motilal Oswal said SBI is well poised for a stronger Q2 due to higher CASA deposits, additional provisions towards wage revisions and NCLT-linked write-backs.
"State Bank of India's (SBI) earnings were suppressed for the past several years due to issues pertaining to asset quality, merger and an adverse rate environment. Even now, the macro environment remains challenging with high rating downgrades in the system, resulting in new names being added to the stressed pool. However, given SBI's size, we believe the new stress is manageable (2 per cent of total loans)," the firm said
SBI posted Rs 2,312 crore Q1 profit as provisions fell 11 per cent YoY. The broking house said the reduction in savings accounts (SA) rate will help offset margin pressure. The linking of floating rate retail and MSME loans to external benchmark will bring in more volatility to bank margins. However, SBI has a higher share of CASA deposits, which puts the bank in a better position to manage yield pressure on the asset side.
India's biggest bank has cut the interest rate on savings accounts with a balance up to Rs 1 lakh to 3.25 per cent, from 3.5 per cent.
"We believe that this will help offset the margin pressure and will gradually become an important tool to control funding costs, it said."
SBI has made additional provisions towards wage revisions (Rs 39.8b) and enhancement in gratuity limit (Rs 27.1 billion) over FY19, which led to elevated operating expenses. Management has guided for curtailing Rs 19 billion of wage-related provisions over FY20E (50 per cent reduction over FY19). We also expect rationalisation of branches and improved efficiency due to technological initiatives undertaken by the bank on the digital front, which will help in controlling operating expenses," Oswal said.
The analyst firm said macro uncertainty remains and stressed exposures (excluding NPA) controlled at 2 per cent of total loans for SBI.
The macro-environment remains challenging with high rating downgrades in the system. This has resulted in new names being added to the stressed pool. Our deep-dive analysis of stressed accounts suggests that SBI's exposure to the new stressed pool constitutes 2 per cent of total loans, which appears manageable.
"We build in elevated credit cost of 1.9 /1.3 per cent for FY20/FY21, which will get partly offset by the NCLT linked write-backs. We, thus, expect GNPL/NNPL ratio to decline to 5.0/1.7 per cent by FY21 while PCR should improve to 66 per cent from 61 per cent in 1QFY20.
Sectoral analysis shows that SBI's NPL ratios have improved sharply with large and mid-corporate/SME NPL ratios improving to 13.6/8.6 per cent as of FY19, while agriculture NPLs have increased by 31 bp to 11.6 per cent. The SMA 1 and 2 for the bank stood at Rs 102.9 billion (0.5 per cent of loans) in 1QFY20," it said.