* SBI’s Q1 profits of R33.5 bn were up 3.3% year-on-year, slightly ahead of our estimates. Operationally it was a healthy quarter with PPOP (pre-provision operating profit)—ex-trading gains—up 29% y-o-y, led by strong cost control (+3% y-o-y).
* Asset quality was mixed while NPLs (non-performing loans) and gross stressed assets (8.3% of loans) were stable, slippages remained high at 3.3% (annualised). Credit costs were lower (129bps annualised) on higher sales (R56 bn) to ARCs (asset reconstruction companies).
* NIMs (net interest margins) were stable at 313bps - higher domestic margins offsetting decline in international NIMs. Expect NIMs to remain range-bound near term.
* Costs were under tight control (+3.3% y-o-y) as management focuses on improving cost efficiencies. Cost income ratio was at 50% (53% in Q1FY14).
Key positives: Strong cost control, robust core operating profits, stable NPLs.
Key negatives: High slippages, slower loan growth (+13% y-o-y).
Impact on financials: We raise earnings 6-9% over FY15-16e to factor in lower operating and credit costs medium term.
Valuations & view: We upgrade SBI to Outperformer with an unchanged target price of R3,013 (standalone bank valued at 1.5x Sep’15e P/BV of R2,561, associate banks at R338 valued at 0.75x Sep’15e P/BV—price-to-book value).
SBI’s core operating profitability has improved sharply in the last two quarters as management has focused on reducing costs, maintaining stable NIMs. While asset quality stress has remained high, we believe stabilising economy should lower credit costs medium term, leading to higher earnings growth. SBI remains amongst the best capitalised PSU banks (9.8% CET 1—common equity tier-1) and a strong deposit franchise (43.5% CASA) and should continue to trade at a premium to other PSU banks. The stock has corrected in the last two months and has underperformed Sensex by 12%, we believe offers an attractive returns from CMP (current market price.)
* SBI’s slippages were higher quarter-on-quarter at 3.3% annualised (2.7% in Q4). The mid-corporate segment continues to be the largest contributor to NPL accretion with R42.5 billion of slippages (43% of total).
* However, aided by sale of NPLs worth R56 bn to ARCs, GNPLs (gross NPL) declined 2% q-o-q (at 4.9% of loans) in absolute terms. SBI also sold R4.9 bn of non-NPL accounts and R7.1bn of written-off accounts to ARCs during the quarter.
* SBI received R5.1 bn in cash and SRs (security receipts) worth R18.2bn as consideration for sale of loans to ARCs. The bank has