Rating- buy; SBI expects strong 14-16% credit growth in FY24

Rating: buy; SBI expects strong 14-16% credit growth in FY24

Jefferies hosted the the chairman, deputy managing director (finance), and chief financial officer of SBI for a non-deal roadshow (NDR) in the US and UK. During the NDR, two topical issues were discussed: the risk from SBI’s exposure to the Adani Group, and the bank’s plans for a capital raise. The management of SBI clarified during the NDR that their exposure to the Adani Group is only 0.9% of their total loans, and that this exposure is limited to cash-generating projects. They further clarified that they have no exposure to Adani Group companies for pledge/acquisition loans, which means they do not see any significant risk from their exposure to the Adani Group.

SBI does not have an immediate plan for capital raising. The bank’s common equity tier 1 (CET1) ratio, which is a measure of a bank’s financial strength, is at 10.2%, which is considered a healthy level. Additionally, the bank is expected to have a return on equity (ROE) that will aid in its growth. SBI continues to stay among our top-picks.

The management highlighted that the bank has sufficient liquidity to meet credit demand with surplus. While term deposit rates were raised, the bank has so far seen only a nominal rise in deposit costs. It is confident that margins will continue to expand for next two quarters with at least a 10bps expansion from Q3 levels. We believe that SBI’s margin expansion can run longer as share of MCLR based loans is at 40% of total, of which 90% is reset over 6-12 months and are yet to fully reprice.

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The management was confident about its exposure to Adani group that forms 0.9% of loans (on total exposure – including undrawn lines, off-balance sheet facilities, bonds & international exposures). In fact, exposure has declined a bit from Rs 270bn to Rs 260bn in recent months and management is confident about repayment as loans are backed by cashflows and none towards promoter-financing and pledges. Broader asset quality indicators are also strong and bank has 0.3% of loans in buffer provisions.

SBI’s focus on profitability was quite encouraging with target ROA level of 1%, which is being passed on to branch level managers as well (3Q ROA was at 1.1%). Opex seemed the key sticky wicket for the bank, especially due to large costs towards pension and wage resets.

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Timing of capital raising was a topical aspect during meetings and mgt. indicated it doesn’t plan to raise capital in near-future as CET I CAR of 10.2% and high retained-ROE seem adequate for growth. It also doesn’t plan any immediate monetisation of stake in subsidiaries. Clarity on Chairman succession (term ends in Oct-23) will be key to watch.

We believe that SBI is well placed to deliver growth and improved profitability without risk emanating from exposure to Adani group. We maintain our Buy call with SOTP based TP of Rs 760, including value of the bank at 1.5x Dec-24 adjusted PB.