State Bank of India Q1 FY2023 Concall Summary

Key Takeaways

• Core profit resilient despite MTM hit: Operating profit fell 32.79% YoY on a headline basis, but core operating profit excluding MTM losses grew 14.39% YoY, revealing a healthy underlying engine.
• Retail engine firing on all cylinders: Retail advances grew 18.58% YoY, with home loan sanctions doubling and the mortgage portfolio posting its best-ever Q1 growth of ₹13,425 crore despite rate hikes.
• Asset quality in steady repair: Gross NPA improved 141 bps YoY to 3.91%, net NPA fell to 1%, and the slippage ratio dropped 109 bps YoY to 1.38%, while credit cost stayed contained at 0.61%.
• Balance sheet crossed a psychological milestone: Total assets surpassed ₹50 lakh crore, a marker management attributes to sustained customer trust.
• What to watch next quarter: Whether the ₹5 trillion pipeline of term loans and unutilized working capital converts into sustained 15% credit growth, and if the promised margin improvement from 3.23% materializes as yields start looking up from July.

Profitability: The MTM Overhang

• Headline vs. core divergence: Non-interest income declined 80.44% YoY, dragging reported operating profit down 32.79% YoY. The entire damage came from a ₹6,549 crore MTM loss on the investment book, which management stressed is a revaluation loss, not an actual loss.
• AFS book composition and recovery path: The ₹6,31,530 crore AFS book holds 60% in GSEC/SDLs and 23% in highly rated corporate bonds. Management expects MTM losses to recover as rates soften, and ₹84,000 crore of redemptions from the AFS book during the year will mechanically bring down the MTM hit.
• Provision write-back provided a partial cushion: A ₹1,295 crore write-back from COVID restructuring provisions, net of ₹300 crore additional provision for credit growth, helped absorb some of the MTM shock.
• Sequential margin dip was a one-off: The sequential decline in domestic net interest margin was driven by ₹600 crore of income tax refund interest that was available last quarter but not this quarter.
• Yield on advances trend is seasonal, not structural: The sequential decline in yield on advances is a recurring pattern: June quarters are low and yields spike toward March quarter after quarter. On a YoY basis, yield improved. Management expects yields to start looking up from July onward.
• Miscellaneous income had a tough comp: The sharp decline in miscellaneous income reflects the absence of dividend income (₹500 crore last year, negative this year), derivative income, and a one-time ₹1,692 crore recovery from Kingfisher in the prior year.
• Investment fluctuation reserve shortfall undisclosed: Management declined to share the quantum of shortfall in the Investment Fluctuation Reserve on the call, offering to provide it offline, though a Board-approved glide path exists and the bank will try to complete it in the current financial year.

Khara: "No. I think I would rather expect the margin to improve from 3.23."

Credit Growth: The 15% Ambition

• Retail momentum is broad and deepening: Home loan applications tripled and sanctions in value terms doubled YoY. The individual mortgage portfolio alone added ₹13,425 crore in Q1, its best-ever first-quarter performance, achieved despite the rate hike cycle.
• SME book crossed a threshold: The SME portfolio moved from ₹2.20 trillion to over ₹3 trillion, driven by supply chain finance and balance sheet lending with careful underwriting. Management noted Q1 growth in SME after many years of stagnation and sees a good pipeline.
• Corporate pipeline is the growth anchor: Term loans and underutilized working capital aggregate to roughly ₹5 trillion, with an additional pipeline of ₹1.2 trillion. Management expects to grow the corporate book by ₹2.5 lakh crore to ₹3 lakh crore from the current ₹8.75 lakh crore.
• International book found new channels: Growth in the international book came from syndicated loans and trade finance, aided by a factoring product introduced 1.5–2 years back that enabled participation on platforms in the USA and UK. Management declined to provide a sector-wise breakup of this growth.
• Demand visibility holds despite rate hikes: Management does not envisage demand tapering off, arguing that risk spreads adjust depending on risk appetite and market dynamics. The savings account rate will stay at 2.70% even as the repo rate rises, with the bank calibrating spreads only if repo crosses 5.45%.

Khara: "I'm quite hopeful the reason behind is kind of a term loan and also the underutilization of the working capital, which is all aggregating to almost 5 trillion, and the pipeline is almost 1.2 trillion. So, I'm quite hopeful that we should be in a position to sustain this in the subsequent quarters."

Asset Quality: Quiet, Steady Repair

• Headline ratios improved across the board: Gross NPA fell 141 bps YoY to 3.91%, net NPA improved 77 bps YoY to 1%, and the slippage ratio dropped 109 bps YoY to 1.38%. Credit cost was contained at 0.61%.
• BB and below book is largely sovereign exposure: The BB and below book share came down from 14% to 13%, and the majority consists of state government loans which are not rated, muting the signal from this metric.
• ECLGS and ECGLS portfolios are behaving: ECLGS disbursements total ₹41,000 crore with an NPA ratio of 1.91%. ECGLS restructuring exposure has declined from ₹32,000 crore to ₹28,000 crore, with ₹2,000 crore repaid and ₹2,000 crore turning NPA.
• Xpress Credit NPAs are transient: NPAs in the Xpress Credit portfolio arise when state governments delay salary payments and get adjusted once salaries are paid. Management called it an aberration and declined to break out new vs. repeat customers or the government cohort share.
• SMA-1 and SMA-2 spike was partly seasonal: The increase in SMA-1 and SMA-2 balances from ₹3,500 crore to ₹7,000 crore is partly explained by Q1 peculiar behavior. About ₹2,800 crore has already been pulled back, bringing the pool to the same range as December 2021.
• Provision buffer usage is disciplined: The ₹7,800 crore provision for restructured assets was used only where repayment has occurred, not otherwise.
• Credit cost guidance is off the table: Management explicitly declined to provide guidance on credit cost trajectory for FY23 or FY24, stating only that the effort will be to bring it down to the extent possible.

Margins & The Rate Cycle

• Margin outlook is for improvement from 3.23%: Management expects the trend to repeat past patterns, starting at a little higher base than Q1 FY22, with yields improving from July onward.
• Deposit rate strategy is franchise-first: The savings account rate will remain at 2.70% irrespective of repo rate increases. Management was explicit that it will be mindful of the franchise and will calibrate spreads according to actual demand only if repo goes above 5.45%.
• CASA ratio faces a denominator challenge: Absolute CASA numbers will increase, but the percentage may not rise much because higher term deposit growth from customer trust is expanding the denominator faster. Management's endeavor is to increase CASA as much as possible and "beat out the competition."
• Investment book will shrink relative to the balance sheet: With advances growing at 14% and deposits at 8.4%, the treasury book will likely not grow as it has in the past. The AFS portfolio will probably come down, and maturing securities plus new purchases are being routed only into HTM.
• AFS to HTM transfers were mistimed: The bank transferred securities from AFS to HTM but could not lock in the benefit before the 40-bps RBI rate hike pushed yields up. Further transfers were done, and there is now decent elbow room in HTM.
• MTM provisioning may have peaked: Having booked MTM losses to the extent of 7.45%, management hopes not to have further instances of providing for depreciation on the AFS book.

Khara: "2.70 we haven't given irrespective of whether it is one lakh or more deposit. If you had gone by the formula then this for more than one lakh the rate would have been lesser than 2.70. So, we have already been incurring 2.70 on the entire balance. So, even now despite the incremental fee, this cost is not going to increase neither it will reflect in the savings bank interest rate."

Operating Model & Digital Initiatives

• YONO 2.0 is in the pipeline: The bank will soon launch YONO 2.0 with advanced features and functionalities, though specifics were not disclosed.
• Contact center has been repositioned: The revamped contact center now handles account inquiries, statements, debit card services, digital banking, pre-delinquency reminders, soft recovery for NPA accounts, early bucket collection outreach, and proactive digital handholding.
• New operations support subsidiary approved: The bank is setting up a subsidiary to help rural branches garner quality business, ensure timely renewals, and reduce NPAs in the agri sector, which management expects will eventually address the cost-to-income ratio.
• Digital account opening is scaling: About 65% of accounts are now being opened digitally.
• Employee cost is largely stable: The cost-to-income ratio remains a focus area, with the new subsidiary seen as a structural lever rather than a near-term fix.
• Agri strategy is shifting upmarket: The bank is focusing on high-value agriculture and SHG financing to improve the quality of the agri book.

Capital & The Equity Question

• AT-1 and T-2 issuance approved: The board has approved raising AT-1 and T-2 bonds worth about ₹11,000 crore, with roughly ₹2,000 crore already redeemed during the month.
• Equity raise is not on the immediate agenda: Management has not deliberated an equity raise at the Board level and declined to share any threshold CET1 level that would trigger such a decision, stating only that it will closely watch the situation and look at options if needed.

Khara: "Well, actually, we have a couple of other options, but we have not really deliberated at the Board level. So, it will not be in order for me to really share those plans in this call."

Guidance & Commitments

Key Metrics