SBI Expects Return On Assets To Touch Highest Level In 16 Years By 2020-21

State Bank of India expects its return on assets—an indicator how profitable a company is relative to its assets—to touch its highest level in 16 years by the fiscal ending March 2021 as the lender’s operating metrics improve and credit costs fall.

India’s largest bank targets its return on assets at 0.4-0.5 percent for 2019-20 and at 0.9-1.0 percent for 2020-21, the management said at a post-earnings analyst meet on Wednesday. SBI had last achieved return on assets of more than 1 percent in 2004-05. The profitability metric fell and even contracted in the last few years as the bank struggled with asset quality issues.

But SBI has been reporting a decline in bad loans for the past few quarters. Its net non-performing assets as a percentage of net advances were at their lowest in at least 10 quarters in the three months ended September. The bank’s profit, too, trebled over the last year during the period, aided by its stake sale in its life insurance subsidiary.

Key Highlights From The Analyst Meet

• SBI targets sub-1 percent credit cost by 2020-21—credit cost was 250 basis points in 2018-19 and 198 basis points as of September 2019.
• Made full provision on two large corporate steel accounts and expects significant recoveries in the second half of the fiscal.
• Expects an improvement in asset quality in the second half of 2019-20, with slippage ratio falling to less than 2 percent versus 2.2 percent in the first six months.
• Focus on credit quality impacting growth.
• Bank expects credit growth of 10 percent/12 percent in FY20/21.
• Loan growth to be primarily driven by retail and higher rated corporate loans.
• Net interest margin expected at 3.15 percent/3.2 percent in FY20/21.
• Bank has seen minimal impact of reducing the rate offered on saving deposit from 4 percent to 3 percent.
• Expects value unlocking from SBI Cards business in a few quarters.
• Bank’s subsidiaries (insurance, AMC and cards) are scaling up steadily with healthy return on equity.

Retail Banking Focus

• SBI aims to grow 18-20 percent in retail housing.
• Plans to tie-up with microfinance lenders and NBFCs to build agri-lending.
• Focus on lowering the risk in SME book by having a greater mix of asset-backed business in the segment.

Here’s What Brokerages Have To Say

UBS

• Believes the bank has a strong retail liability franchise, while asset quality challenges exist in the near term.
• Post recent correction, the stock is trading at 0.7 times its estimated price-to-book value for FY21.
• Maintains target price at Rs 375 a share.

HSBC

• The risk of some chunky corporate stress is not fully behind (for instance, in telecom and housing finance companies)
• Expects the bank to have strong buffers.
• Target price unchanged at Rs 400.
• Values the bank at 1.2 times its FY22 consolidated book value per share.

Edelweiss

• Given the substantial risk aversion, the stock is expected to do well.
• Maintains ‘Buy’ with a target price of Rs 390 apiece.

Axis Capital

• Maintains ‘buy’ with a target price of Rs 360 a share.
• Despite attractive valuations, SBI has lagged its private peers in performance given the bad loan problems.
• Second quarter provides comfort. Despite few exposures to NBFCs/telecom, a sharp reduction in credit costs is expected. That should improve RoA.
• Subsidiaries are now lot more valuable—at a 10 percent holding company discount. They now contribute about 40 percent to the brokerage’s target price.

The highlights from analyst meet has been compiled from the research reports of Citi, HSBC, Jefferies, Edelweiss, Axis Capital and UBS.