State Bank of India chairman Dinesh Kumar Khara told brokerage firm Motilal Oswal that Indian banking system is quite resilient at a time when global banking system has been facing challenges primarily due to liquidity issues rather than asset quality.
“The global banking system has been facing challenges primarily due to liquidity issues rather than asset quality. The portfolio duration and concentration of loans/deposits under various categories have also caused problems. However, the Indian banking system has remained quite resilient thanks to active supervision and higher governance standards set by the Reserve Bank of India (RBI). However, State Bank of India (SBI) does not see any significant challenges to the Indian banking system,” Khara told brokerage firm Motilal Oswal.
The domestic market remains fairly strong, which should support growth. The corporate sector is likely to see a pick-up as the focus on infrastructure will revive owing to the government’s push (70% of fresh capex being led by the private sector). SBI has a strong pipeline of sanctions and its undisbursed term loans are coming down which indicate that utilization is increasing. The manufacturing, export, renewables, batteries and EV segments are likely to be the key growth drivers. The rural sector is also witnessing an improvement due to Agri startups, which, along with SME value chains, are focusing on improving the efficiency. Overall, loan growth is likely to moderate from the current level of 16-17% and credit growth is likely to be 14-16% over FY23/FY24, Motilal Oswal said in a report after its interaction with Khara.
The bank believes that there is an opportunity to pass on the MCLR hike which along with lagged re-pricing of deposits, which should boost margin in the coming quarters. Quality of advances remains fairly under control, with a constant moderation in asset quality ratios. Slippages have been under control and the bank does not expect any challenges.
“The initial target is to bring down the non-performing assets (NPA) and special mention account (SMA) books on a yearly basis. The GNPA ratio in the retail segment is 0.67%, while average loan to value (LTV) ratio stands at 55-60%, and thus the bank does not expect any challenges going ahead. The focus remains on keeping the credit cost at 50 basis points. On the recovery front, since chunky recoveries are largely over, the bank expects granular recoveries going ahead. In terms of the restructured book, the bank is carrying provision coverage ratio (PCR) of 30% with controlled NPAs; hence, the bank does not expect any significant challenges from this book,” Khara added.
The bank’s digital banking platform YONO is showing steady growth in business.
“YONO has a registered user base of 60 million and has already generated Rs 1 lakh crore in loans. It is opening 30,000 plus savings accounts daily, while in principal approval for gold loans stands high at 52-53%. Further, the cost of acquisition is lower for YONO, which is likely to result in operating efficiency and moderation in cost ratios. While the cost-to-assets ratio remains among the lowest, the bank believes that it can further improve the ratio by a few basis points,” Motilal Oswal said.
While the initial target was to deliver return on assets (RoA) of 1% and return on equity (RoE) of 15% by FY24, the bank is ahead of its target and expects to achieve this by March 2023 or first quarter of current financial year. Overall, SBIN targets to deliver RoA of more than 1% on a sustainable basis, the brokerage firm added
SBIN does not expect any challenges with respect to asset quality. About 34% of the book pertains to local lending, 38% being ECB loans linked to high-rated Indian corporate and 28% being trade finance (factoring). The GNPA ratio stands at 0.41% and has witnessed further moderation, Motilal Oswal said.
SBIN’s robust performance has been aided by strong loan growth, margin expansion and lower provisions. The improvement in its treasury performance (which supported other income) and controlled opex led to healthy growth in core pre-provisioning operating profit (PPOP). A high mix of floating loans, which will benefit from the re-pricing of MCLR loans, will continue to aid net interest income (NII) and earnings, even as the cost of deposits may see some increase.
The asset quality performance remains strong with consistent improvements in headline asset quality ratios, while the restructured book remains under control at 0.9%. We estimate State Bank of India to deliver RoA and RoE of 1.0% and 17.2% respectively by FY25.
Motilal Oswal has a buy rating on SBI for target price of Rs 725.
