SBI Q1 review: Analysts cut earnings estimate to factor MTM loss, weak NIM

SBI Q1: The country's biggest state-owned lender reported a net profit of around Rs 6,070 crore (down 7 per cent year-on-year) with the miss being driven by 13 bps sequential decline in NIM

SBI Q1 review: The April-June quarter of fiscal 2022-23 (Q1FY23) earnings of State Bank of India (SBI) has left analysts unimpressed. Most brokerages have either maintained or cut their earnings’ forecast for fiscal 2023 (FY23) and fiscal 2024 (FY24), citing a miss on net interest margin (NIM) in the quarter gone by, lowest net interest income (NII) growth in Q1 among top five banks, and likely capital requirement in the medium-term.

"We are cutting the FY23E earnings per share (EPS) by 1 per cent. The cut in operating profit is higher at 10 per cent, but we are also lowering our credit cost from 90 basis points (bps) to 75bps, leading to a muted overall cut. However, we anticipate 15–17 per cent downside to our EPS for FY23 if the bank does not sell a stake in one of its subsidiaries," said Edelweiss Securities.

The brokerage has downgraded the stock from ‘Buy’ to ‘Hold’, and has revised the target to Rs 595 from Rs 640.

"We believe loan growth has peaked. While NIM would improve from current levels, it has been reset to a lower base following the miss in Q1FY23, leading to a cut in our full-year NIM forecast," it added.

At the bourses, shares of SBI fell 3.2 per cent to Rs 514 apiece on the BSE in the intra-day trade on Monday. In comparison, the BSE Sensex index was up 0.27 per cent at 9:45 AM.

The country’s biggest state-owned lender reported a net profit of around Rs 6,070 crore (down 7 per cent year-on-year) with the miss being driven by 13 bps sequential decline in NIM, and Rs 6,549-crore mark-to-market (MTM) loss on available for sale (AFS) portfolio.

Analysts said SBI likely had large hedge losses on its underlying foreign exposure which would have gained as foreign NIM increased 60 bps, from 1.39 per cent in fourth quarter of fiscal 2021-22 (Q4FY22) to 1.98 per cent in 1QFY23. If adjusted, actual NIM may lower further by 10 bps.

That apart, net loans grew 15.8 per cent YoY, and was higher than expected. Sequentially, retail and SME segments grew 3.2 per cent and 2.4 per cent, while corporate was flat. Unsecured loans grew 4.8 per cent QoQ. Domestic deposits were weak, and stood flat sequentially, with current account-saving account (CASA) ratio at 45.3 per cent.

Global brokerage Jefferies highlighted that the bank's CASA growth has been relatively weak over the past 3 quarters at 7-10 per cent, and within that savings deposit growth has also been similar.

"We lower our FY23 earnings by around 6 per cent as we incorporate treasury losses. We see 14 per cent CAGR in loans over FY22-25, but that may also require raising capital as its Common Tier I CAR of 9.7 per cent (versus minimum requirement of 8.6 per cent) would need to be boosted," it said.

Nomura, meanwhile, has cut its FY23/FY24/FY25 EPS estimates by 2.4 per cent/0 per cent/2 per cent.

That said, analysts remain positive on the lender from a long-term perspective as they expect stability in the rate environment to avert any further MTM losses. Moreover, high mix of floating loans, which will benefit from a re-pricing of loans, will support NII and the overall earnings trajectory in coming quarters.

"We don’t read too much into the investment losses as it is not a permanent loss. We can only see negligible asset quality risk and a high probability of further decline in net non-performing loans (NNPL) ratios, which implies negligible credit costs in the near-term," said Kotak Institutional Equities.

Costs are under control and we see that the operating profit growth should be quite solid among all the large banks. Overall, this implies that the return ratios for the bank should be well over 15 per cent levels in the medium term, it added.

Valuation-wise, SBI is currently trading at 1.0x FY24E book value per share (BVPS; core bank) which is at its long term mean valuations. Analysts say incremental stock price performance will be driven by pick-up in credit growth, and steady improvement in asset quality, and return profile.