ICICI Securities Maintains ‘Buy’ Rating for SBI, Target Set at ₹1000

ICICI Securities is optimistic about State Bank of India (SBI), giving it a “Buy” rating with a target price of ₹1000 in their report dated October 15, 2024.

Strong Asset Quality

SBI has a solid reputation for asset quality in its unsecured retail loans, with a Gross Non-Performing Asset (GNPA) ratio consistently below 1%. The bank’s customer base mainly consists of state and central government employees, as well as top corporates and public sector undertakings (PSUs). This gives SBI a strong portfolio, which supports confidence in its asset quality. While we expect some increase in net slippages, we believe that around 50 basis points (bps) in credit costs will be sufficient, as the net NPA appears to be stable at around 0.6%. Even with a slight dip in Net Interest Margin (NIM), SBI is expected to maintain a Return on Assets (RoA) of about 0.9% to 0.95% for FY25-26, translating to over 15% Return on Equity (RoE). It’s important to note that the gap in RoRWA (Return on Risk-Weighted Assets) compared to private peers is narrowing.

Strong Positioning in Current Market

In a market where credit growth may be limited due to a high Loan-to-Deposit Ratio (LDR), SBI is in a strong position with one of the lowest domestic LDRs at 69%. Although SBI’s deposit growth is slower than the overall system, this is less concerning when considering LDR levels. The bank has a high proportion of regulatory retail deposits, and its low run-off rates suggest it has room to use more funds if necessary. Even though SBI’s Savings Account (SA) rates are 30-80 bps lower than private banks, it still holds a large share of savings accounts and leads in fixed deposit pricing, though it needs to improve its Current Account (CA) share and fee income.

Healthy Loan Growth Expected

Unlike other public sector banks, SBI has maintained a stable credit market share of about 22-23%. The bank has achieved consistent loan growth across SME, retail, and corporate sectors and is expected to benefit from an increase in corporate capital expenditure. We estimate a loan growth of around 15% CAGR from FY24 to FY26, which is slightly above the industry average. Even though overall loan growth is slowing down, SBI is likely to gain market share due to its improved credit delivery and competitive funding advantages.

Strong Asset Quality Outlook

There are concerns about slippages and asset quality due to external factors affecting unsecured personal and corporate loans. However, we do not see any risks of large losses because of management continuity, as the current chairman has a strong background in the bank. Although SBI’s method of reporting may lead to higher gross slippages, recoveries are expected to rise simultaneously, meaning there will be no negative impact on credit costs or GNPA.

Insights on Unsecured Loans

SBI has a similar share of personal loans to large private banks, but its credit card business is managed separately through SBI Cards. This is important since other banks have reported rising stress in their credit card segments. SBI has experienced a slight increase of 20 bps QoQ in its unsecured Xpress credit. While we remain cautious about unsecured personal loan quality across the sector, SBI’s Xpress credit portfolio is fundamentally stronger. Over 80% of these loans are given to government employees, making the portfolio less vulnerable to defaults.

Credit Costs and Slippages Outlook

We estimate that net slippages will rise to about 50 bps for FY25/26, compared to 26 bps in FY24. While credit costs may increase gradually, they are not expected to become a major concern. Over the last three years, SBI’s cumulative net slippages were around 50 bps, while cumulative loan loss provisions were about 150 bps. The difference indicates a reduction in net NPA, which currently stands at a good 57 bps. Thus, credit costs are likely to mostly cover net slippages moving forward, rather than reducing net NPA further.