SBI Q3 Results Review - Earnings Impacted By Wage Hike Related Provisions, One-Offs: Systematix

Systematix Research Report

State Bank of India bank reported Q3 FY24 profit after tax of Rs 92 billion (-36% QoQ, -32% YoY) which was lower than our estimates of Rs 130 billion. While net interest income was in-line with estimates, reported earnings came in lower mainly due to higher wage-related provisions and soft other income. Key highlights were:

1. Advances growth increased by 5.2% QoQ, 15% YoY. Incremental growth contribution was led by corporate and small and medium enterprise (43% contribution in Q3 versus 13% in Q2), whilst contribution from retail declined QoQ (31% contribution in Q3 versus 36% in Q2) mainly due to weak home loan growth,

2. Deposit growth was weak at 1.6% QoQ, 13% YoY, 10% year-to-date annualised and led by term deposit growth of 3% QoQ. Current account and savings account growth was flattish QoQ (1% YTD annualised). Domestic CASA ratio declined to 41.2% (-70 bps QoQ). Market borrowings increased 8% qoq (12% YTD),

3. On a calculated basis, net interest margin declined by 8 bps QoQ due to higher cost of funds (+21 bps QoQ) partly offset by higher yield on IEA (+12 bps QoQ) with utilisation of additional liquidity,

4. CIR increased to 74.2% (versus 61.4% in Q2 FY24) due to wage hike arrears (Rs 63 billion), pension liability (Rs 54 billion) and Dearness relief neutralisation (Rs 17 billion) which was partly offset by decline in other overheads by 3% QoQ,

5. Asset quality stable: Gross non-performing asset at 2.4% (-13 bps QoQ), net non-performing asset at 0.6% (stable QoQ), provision coverage ratio at 74.2% (-128 bps QoQ).

6. SBI also provided Rs 2.4 billion for downstream alternative investment fund investments on the back of new RBI regulations. This impact was offset by provisions reversals from investment depreciation (Rs 6 billion) and release of Rs 3.7 billion of restructuring provisions due to decline in restructured book,

7. Ex one-offs, 9M FY24 return on asset/return on equity was at 1.06%/22% versus 0.94%/19.47% reported. Company also maintained its FY24 RoA guidance of 1%+.

8. SBI highlighted that it remains open to raising capital if credit demand remains strong, but it does not foresee an immediate requirement.

   We think a capital raise is likely in the coming quarters as including profits CET-1 is at 10.38% versuss 9.41% (post-merger with associate banks), as of April 01, 2017, when the bank last raised capital (Rs 150 billion in June-2017). Any further tweaking of risk weights by RBI would bring it closer to the threshold.

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