JP Morgan says that SBI Q3 21 net income came in 2% ahead of JPMe with a positive print on asset quality. Stress formation in the bank (9M restructuring + slippage 2.1%) is tracking well under the 2.5% full year guidance laid down by the bank implying scope for upside surprise. Core PPOP was up 22% yoy and 4% above JPM estimates aided by higher non interest and recovery income from written off accounts despite drag on opex (wage settlements). Growth trends are encouraging, advances up 3% qoq and 8% yoy led by retail. The current share price of SBi Is Rs 411 up Rs 4 or 1%. 

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SBI NIMs were flat at 3.1% benefiting from lower cost of funds. Curtailed stress formation, recoveries from legacy NPLs and broad based growth in loan book sets up a construct for reflation in ROAs back to historical range of 0.7-1% after a 6 year down cycle. Maintain Overweight on SBI says JP Morgan.

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Stress formation well within target, Credit costs of SBI should normalize ahead:

SBI’s total slippage / restructuring book at Rs 400 bn is well within the Rs 600 bn guidance laid down last Quarter. Notably, corporate books accounted for 65% of the restructuring and with the contribution of one large account. The bank’s standard asset provision (ex pro forma NPL/ restructuring) is 25bps. Against this SMA1-2 book is 55bps with no major contribution from large loans.

SBI Recoveries over next Quarter can drive earnings upgrade:

JP Morgan estimates recovery from two large accounts (Dewan / Bhushan Steel) can net SBI an added Rs 80 bn and sustain earnings momentum into Q4 and provide additional buffer on provisions given these are written off accounts. Successful resolution of these would also allow investors to impute higher recovery from other written-off accounts going ahead especially given the bank's large historical NPL book.

SBI Retail loan traction is strong while Corporate side is flattish:

Retail advances increased 15% yoy aided by strong disbursements notably in mortgages with sanctions /disbursements up +25% yoy and +23% yoy. Within personal loans a strong impetus to growth was coming from gold loans (+4x yoy) while express credit grew 35% yoy. Deposit accretion remains healthy (+14% yoy) led by 15% yoy growth in CASA. The bank is sitting at excess SLR of 14% and LCR at 171% which can support NIMs ahead.

JP Morgan increased their F21 / F22 EPS by 19% / 4% as they factor-in lower credit costs. JP Morgan also roll forward their price target on SBI to Mar-22 at Rs 440 valuing the parent bank at 1x F23E P/B and as the bank starts delivering historical ROA, valuation normalization we believe should happen as seen in other private banks.