State Bank of India (Q1 FY14)
India Infoline News Service | Mumbai |
Loan growth moderates; deposits growth remains strong NIM declines materially on sequential basis; medium term outlook remains weak
CMP Rs1,605, Target Rs1,717, Upside 7.0%
Source: Company, India Infoline Research
Loan growth moderates; deposits growth remains strong
SBI’s advances growth moderated to 15% yoy from 20% yoy in the previous quarter. Domestic credit grew by 16% yoy driven by healthy growth in large corporate (19% yoy), mid corporate (21% yoy) and retail segment (16% yoy). Within the large and mid corporate segments, SBI has been focusing on creating high quality assets. In the retail segment, the bank has been witnessing strong traction in home (up 18% yoy) and auto loans (up 39% yoy). SBI being growth averse in SME segment, the book contracted by 5% sequentially and represented a modest growth of 9% yoy. Domestic deposits growth continues to be healthy at 15% yoy driven by decent traction in savings (up 12% yoy) and term deposits (up 18% yoy). SBI’s deposits franchise remains the strongest in the industry with savings ratio at 37% and contribution of bulk deposits and CDs combined at <1%. We have tempered assumptions of loan growth for FY14/15 to 14%/17% respectively.
NIM declines materially on sequential basis; medium term outlook remains weak
SBI’s blended NIM weakened for the fifth consecutive quarter. In the aforesaid period, cumulative domestic margin has fallen by 73bps currently standing at 3.44%. On account of substantial slippages, material restructuring and lower base rate during the quarter, domestic lending yield fell sharply on qoq basis to a multi-quarter low of 10%. The cost of deposits on the other side came-off only marginally by 4bps with term deposits rates being stubborn. International NIM at 1.5% was also modest in comparison to that reported by the bank in past couple of years. Though SBI is upbeat about clocking a domestic NIM of 3.5-3.6% for the full year, we think there could be a 10-15bps slippage as there could be further moderation in credit growth.
Lackluster fee growth continues; C/I ratio deteriorates sharply
Core fee income growth remained weak; declined yoy by 2%. This was the fifth quarter in a row where fees contracted yoy; broad-based weakness continues which is likely to a while to recover. Buoyed by huge realized gains on the bond portfolio and material gains on other investments, bank’s trading profit stood at substantial Rs120bn. On account of higher provisioning with respect to wage settlement and increased pension liability, the staff expenses jumped by 35% yoy. Overheads also increased by robust 25% yoy and therefore the overall opex growth stood high at 31%. Consequently, C/I ratio deteriorated sharply to 53% as compared to 44% in Q1 FY13 despite higher trading gains.
Delinquency ratio hits a new high; lower provisioning causes a fall in PCR
Fresh slippages came in significantly higher at Rs138bn; nearly 2x our estimate of Rs73-75bn and 2.4x the level reported in the previous quarter. Annualized delinquency ratio hit a new high of 5.2%; was at alarming 6% on the domestic book. While the bank continued to witness high delinquencies in mid corporate segment (5.5%), the pace increased materially in large corporate (4.4%), SME (8.7%) and Agri (10.3%) segments. With recoveries and upgrades relatively modest at Rs29bn and lower write-offs, the net addition to Gross NPLs was substantial Rs97bn causing the ratio to spike to 5.5%. With the bank having to accommodate higher opex and significant investment depreciation (Rs5.3bn), provisioning made against incremental NPLs was modest (though above regulatory requirements) driving a sharp decline in coverage ratio to 60.6%. Consequently, the increase in Net NPLs was significantly higher at 37% on qoq basis. Loans worth Rs50bn were restructured during the quarter. Asset quality outlook remains grim with substantial stressed asset creation to continue for some more quarters.
Valuation and earnings under pressure; retain MP rating
Both on revenue and asset quality fronts, SBI’s Q1 FY14 performance was disappointing. Though SBI has been better placed than other PSU Banks due to higher margins (function of its robust deposits franchise); a much sharper deterioration in bank’s asset quality has been undermining this advantage. For record, SBI has delivered RoA of 0.84% in the past three quarters, not significantly better than other large PSBs. So there is a likelihood of valuation convergence in the near term with SBI’s relatively premium contracting.
Absolute valuation multiple anyway needs to be adjusted lower as we cut earnings and ABV estimates significantly for FY14/15 to incorporate a much difficult operating environment. We now expect net profit to be nearly flat over FY13-15. We have lowered 9-month target price to Rs1,717 and continue to rate the bank as Market Performer.
Financial Summary
- Loan growth moderates; deposits growth remains strong
- NIM declines materially on sequential basis; medium term outlook remains weak
- Lackluster fee growth continues; C/I ratio deteriorates sharply
- Delinquency ratio hits a new high; lower provisioning causes a fall in PCR
- Valuation and earnings under pressure; retain MP rating
| (Rs mn) | Q1 FY14 | Q4 FY13 | % qoq | Q1 FY13 | % yoy |
| Total Interest Income | 317,183 | 307,842 | 3.0 | 289,167 | 9.7 |
| Interest expended | (202,065) | (197,058) | 2.5 | (177,979) | 13.5 |
| Net Interest Income | 115,119 | 110,784 | 3.9 | 111,188 | 3.5 |
| Other income | 44,743 | 55,467 | (19.3) | 34,988 | 27.9 |
| Total Income | 159,862 | 166,251 | (3.8) | 146,176 | 9.4 |
| Operating expenses | (84,349) | (88,645) | (4.8) | (64,410) | 31.0 |
| Provisions | (28,659) | (41,810) | (31.5) | (24,563) | 16.7 |
| PBT | 46,854 | 35,797 | 30.9 | 57,203 | (18.1) |
| Tax | (14,443) | (2,804) | 415.0 | (19,688) | (26.6) |
| Reported PAT | 32,411 | 32,992 | (1.8) | 37,516 | (13.6) |
| EPS | 189.5 | 192.9 | (1.8) | 223.6 | (15.2) |
| (Rs mn) | Q1 FY14 | Q4 FY13 | chg qoq | Q1 FY13 | chg yoy |
| NIM (%) – Overall | 3.2 | 3.3 | (0.2) | 3.6 | (0.4) |
| NIM (%) - International | 3.4 | 3.7 | (0.2) | 3.9 | (0.4) |
| NIM (%) - Domestic | 1.5 | 1.5 | (0.0) | 1.8 | (0.3) |
| Yield on Adv (%) | 10.1 | 10.5 | (0.5) | 10.9 | (0.8) |
| Cost of Dep (%) | 6.3 | 6.3 | (0.0) | 6.2 | 0.0 |
| CASA (%) | 44.7 | 46.5 | (1.8) | 46.1 | (1.5) |
| C/D (%) | 84.4 | 86.9 | (2.6) | 83.1 | 1.2 |
| Non-interest income (%) | 38.9 | 50.1 | (11.2) | 31.5 | 7.4 |
| Cost to Income (%) | 52.8 | 53.3 | (0.6) | 44.1 | 8.7 |
| RoA (%) | 0.8 | 0.8 | - | 1.0 | (0.2) |
| CAR (%) | 12.1 | 12.9 | (0.8) | 13.2 | (1.1) |
| Gross NPA (%) | 5.6 | 4.8 | 0.8 | 5.0 | 0.6 |
| Net NPA (%) | 2.8 | 2.1 | 0.7 | 2.2 | 0.6 |
Loan growth moderates; deposits growth remains strong
SBI’s advances growth moderated to 15% yoy from 20% yoy in the previous quarter. Domestic credit grew by 16% yoy driven by healthy growth in large corporate (19% yoy), mid corporate (21% yoy) and retail segment (16% yoy). Within the large and mid corporate segments, SBI has been focusing on creating high quality assets. In the retail segment, the bank has been witnessing strong traction in home (up 18% yoy) and auto loans (up 39% yoy). SBI being growth averse in SME segment, the book contracted by 5% sequentially and represented a modest growth of 9% yoy. Domestic deposits growth continues to be healthy at 15% yoy driven by decent traction in savings (up 12% yoy) and term deposits (up 18% yoy). SBI’s deposits franchise remains the strongest in the industry with savings ratio at 37% and contribution of bulk deposits and CDs combined at <1%. We have tempered assumptions of loan growth for FY14/15 to 14%/17% respectively.
NIM declines materially on sequential basis; medium term outlook remains weak
SBI’s blended NIM weakened for the fifth consecutive quarter. In the aforesaid period, cumulative domestic margin has fallen by 73bps currently standing at 3.44%. On account of substantial slippages, material restructuring and lower base rate during the quarter, domestic lending yield fell sharply on qoq basis to a multi-quarter low of 10%. The cost of deposits on the other side came-off only marginally by 4bps with term deposits rates being stubborn. International NIM at 1.5% was also modest in comparison to that reported by the bank in past couple of years. Though SBI is upbeat about clocking a domestic NIM of 3.5-3.6% for the full year, we think there could be a 10-15bps slippage as there could be further moderation in credit growth.
Lackluster fee growth continues; C/I ratio deteriorates sharply
Core fee income growth remained weak; declined yoy by 2%. This was the fifth quarter in a row where fees contracted yoy; broad-based weakness continues which is likely to a while to recover. Buoyed by huge realized gains on the bond portfolio and material gains on other investments, bank’s trading profit stood at substantial Rs120bn. On account of higher provisioning with respect to wage settlement and increased pension liability, the staff expenses jumped by 35% yoy. Overheads also increased by robust 25% yoy and therefore the overall opex growth stood high at 31%. Consequently, C/I ratio deteriorated sharply to 53% as compared to 44% in Q1 FY13 despite higher trading gains.
Delinquency ratio hits a new high; lower provisioning causes a fall in PCR
Fresh slippages came in significantly higher at Rs138bn; nearly 2x our estimate of Rs73-75bn and 2.4x the level reported in the previous quarter. Annualized delinquency ratio hit a new high of 5.2%; was at alarming 6% on the domestic book. While the bank continued to witness high delinquencies in mid corporate segment (5.5%), the pace increased materially in large corporate (4.4%), SME (8.7%) and Agri (10.3%) segments. With recoveries and upgrades relatively modest at Rs29bn and lower write-offs, the net addition to Gross NPLs was substantial Rs97bn causing the ratio to spike to 5.5%. With the bank having to accommodate higher opex and significant investment depreciation (Rs5.3bn), provisioning made against incremental NPLs was modest (though above regulatory requirements) driving a sharp decline in coverage ratio to 60.6%. Consequently, the increase in Net NPLs was significantly higher at 37% on qoq basis. Loans worth Rs50bn were restructured during the quarter. Asset quality outlook remains grim with substantial stressed asset creation to continue for some more quarters.
Valuation and earnings under pressure; retain MP rating
Both on revenue and asset quality fronts, SBI’s Q1 FY14 performance was disappointing. Though SBI has been better placed than other PSU Banks due to higher margins (function of its robust deposits franchise); a much sharper deterioration in bank’s asset quality has been undermining this advantage. For record, SBI has delivered RoA of 0.84% in the past three quarters, not significantly better than other large PSBs. So there is a likelihood of valuation convergence in the near term with SBI’s relatively premium contracting.
Absolute valuation multiple anyway needs to be adjusted lower as we cut earnings and ABV estimates significantly for FY14/15 to incorporate a much difficult operating environment. We now expect net profit to be nearly flat over FY13-15. We have lowered 9-month target price to Rs1,717 and continue to rate the bank as Market Performer.
Financial Summary
| Y/e 31 Mar (Rs m) | FY12 | FY13 | FY14E | FY15E |
| Total operating income | 576,426 | 603,661 | 659,815 | 734,393 |
| yoy growth (%) | 19.2 | 4.7 | 9.3 | 11.3 |
| Operating profit (pre-prov) | 315,736 | 310,817 | 314,259 | 343,914 |
| Net profit | 117,074 | 141,050 | 122,566 | 137,070 |
| yoy growth (%) | 41.7 | 20.5 | (13.1) | 11.8 |
| EPS (Rs) | 174.5 | 206.2 | 179.2 | 200.4 |
| Adj.BVPS (Rs) | 1,015.3 | 1,124.6 |
***Note: This is a
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