State Bank of India (Q3 FY13)

India Infoline News Service | Mumbai |

Asset quality to act as overhang on valuation; retain MP rating

CMP Rs2,207, Target Rs2,387, Upside 8.1% 
  • Healthy loan growth; CASA improves by 50bps qoq 
  • NIM was stable; to moderate in the longer term
  • Lackluster fee growth continues; C/I ratio improves on flat opex
  • High slippages and lower upgrades/recoveries drive higher provisioning 
  • Asset quality to act as overhang on valuation; retain MP rating
Result table
(Rs mn) Q3 FY13 Q2 FY13 % qoq Q3 FY12 % yoy
Total Interest Income 303,436 296,068 2.5 276,614 9.7
Interest expended (191,892) (186,330) 3.0 (161,956) 18.5
Net Interest Income 111,545 109,738 1.6 114,659 (2.7)
Other income 36,485 33,466 9.0 21,260 71.6
Total Income 148,030 143,205 3.4 135,918 8.9
Operating expenses (70,122) (69,668) 0.7 (63,318) 10.7
Provisions (26,679) (18,256) 46.1 (24,074) 10.8
PBT 51,229 55,280 (7.3) 48,526 5.6
Tax (17,268) (18,699) (7.7) (15,895) 8.6
Reported PAT 33,961 36,581 (7.2) 32,630 4.1
EPS 202.4 218.1 (7.2) 205.5 (1.5)

(Rs mn) Q3 FY13 Q2 FY13 chg qoq Q3 FY12 chg yoy
NIM (%) – Overall 3.3 3.3 (0.0) 4.1 (0.7)
NIM (%) - International 1.4 1.4 - - 1.4
NIM (%) - Domestic 3.6 3.7 (0.1) 4.4 (0.8)
Yield on Adv (%) 10.8 10.9 (0.1) 10.9 (0.2)
Cost of Dep (%) 6.3 6.3 0.0 5.9 0.4
CASA (%) 45.5 45.0 0.6 47.5 (2.0)
C/D (%) 84.6 81.8 2.8 84.5 0.0
Non-interest income (%) 32.7 30.5 2.2 18.5 14.2
Cost to Income (%) 19.0 18.0 1.1 13.1 5.9
Provisions/Avg.Adv (%) 47.4 48.6 (1.3) 46.6 0.8
RoE (%) 14.7 18.3 (3.5) 18.1 (3.4)
RoA (%) 0.9 1.0 (0.1) 1.0 (0.1)
CAR (%) 12.2 12.6 (0.4) 11.6 0.6
Gross NPA (%) 5.3 5.2 0.1 4.6 0.7
Net NPA (%) 2.6 2.4 0.2 2.2 0.4
Source: Company, India Infoline Research

Healthy loan growth; CASA improves by 50bps qoq
SBI’s advances grew slightly ahead of our estimate at 5.5% qoq/16% yoy. Domestic book grew by 5% qoq/13% yoy mainly led by the large corporate book that grew by 7.5% qoq/27% yoy. Delinquencies in large corporate segment (0.5%) have been negligible so far whereas it is at alarming levels in mid corporate (10.8%) and SME (7.8%) segments. In both these segments, the bank is averse to grow. Retail book (NPL levels at 2.4%) continues to grow at healthy pace of 4% qoq/14% yoy. In this segment, bank is mainly focused on home loans and auto loans. C/D ratio improved materially to 85% (280bps qoq) as the bank largely utilized surplus balance sheet liquidity. Deposit growth was at muted 2% qoq but strong on yoy basis at 16%. Bank’s deposit franchise remained one of the best with CASA at 45.5% (up 50bps qoq) and share of bulk deposits + CDs at just 1%.

NIM was stable; to moderate in the longer term
After falling significantly in Q2 FY13, SBI’s NIM stabilized near 3.3%. Domestic business NIM marginally corrected to 3.63% (-5bps qoq) due to decline in yield on advances on the back of high slippages/restructuring and reduction in interest rates for SME/retail loans. The cost of deposits remained stubborn at 6.3% with the bank not having announced a material deposits rate cut. As SBI has negligible share of bulk deposits and CDs, the bank did not benefit from the steep decline in wholesale funding rates unlike many other banks. Domestic margin was supported by improvement in C/D ratio and an uptick in CASA ratio. SBI’s international NIM was stable at 1.42%. Bank expects domestic NIM to be in the range of 3.7-3.75% aided by productive deployment of surplus liquidity and robust deposits franchise. We expect NIM in the longer term to trend lower with the onset of base rate reduction cycle and shift in the loan mix in the favour of relatively lower yielding large corporate and retail segments.

Lackluster fee growth continues; C/I ratio improves on flat opex
Core fee income growth remained weak; declined yoy by 3%. There has been a broad-based weakness in the fee income which is likely to a while to recover. Trading gains were higher at Rs4.2bn; in which domestic equity and bond portfolio gains were Rs2.1bn and Rs1.2bn respectively. Opex was flattish due to lower provision on pension. As a result of, C/I ratio improved by 120bps qoq to 47.4%.

High slippages and lower upgrades/recoveries drive higher provisioning 
Fresh slippages came in at of Rs82bn (delinquency ratio at 3.5%), significantly higher than our estimate of Rs70bn. Large part of incremental slippages continue to come from mid corporate and SME segments. Delinquencies in large corporate and retail segments remained benign. Combined recoveries and upgrades stood 37% lower on sequential basis resulting into Gross NPL ratio increasing to 5.3%. Through credit cost was up 50% qoq and stood at annualized 1.2%, it was at modest 51% of the net addition in GNPL block (excluding write offs). Resultantly, PCR declined marginally to 61.5% and Net NPL ratio increased materially to 2.6%. Approximately Rs28-30bn worth of loans were restructured during the quarter; restructuring in Q4 FY13 could be in the range of Rs35-40bn (of which Suzlon would be ~Rs30bn). Asset quality outlook for Q4 looks slightly better with Rs15-20bn worth of Q3 slippages having been upgraded post CDR restructuring. We also expect cash recoveries to be higher. 

Asset quality to act as overhang on valuation; retain MP rating
While SBI’s Q3 FY13 revenue performance was in-line, the extent of asset quality deterioration disappointed. This along with fragile near-term outlook on slippages has shaken the market presumption that worst was behind for the bank. With higher margins, SBI is undoubtedly better placed than other PSU banks in managing the ongoing stress. We roll-over our target multiple to the newly introduced FY15 adj.BV estimate and retain market performer rating with 9-month target price of Rs2,387.

Financial Summary
Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Total operating income 576,426 602,942 691,205 803,660
yoy growth (%) 19.2 4.6 14.6 16.3
Operating profit (pre-prov) 315,736 318,790 370,113 437,616
Net profit 117,074 148,742 166,069 193,438
yoy growth (%) 41.7 27.1 11.6 16.5





EPS (Rs) 174.5
BSE 312.75 [1.30] ([0.41]%)
NSE 312.25 [1.75] ([0.56]%)

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