• Domestic loan growth decelerates to 15.5% yoy 

• Robust growth in retail term deposits; NIM improves marginally

• Fee growth improves; one-off provisioning impact opex growth 

• Asset quality deteriorates; mid corporate/SME segments key culprits 

• Low valuation to support price unless operating environment worsens

Domestic loan growth decelerates to 15.5% yoy   

SBI's domestic credit growth decelerated to 15.5% yoy from 19% yoy in the previous quarter driven by a sharp growth moderation in large corporate (from 36% yoy to 27% yoy), mid corporate (from 27% yoy to 23% yoy) and SME segments (from 3% yoy to -6% yoy). Sequentially, the loan book in mid corporate and SME segments contracted by 0.3% and 3.4% respectively representing bank's averseness to grow in these segments. Even within large corporate segment, SBI's remains focused on better rated loans. Retail segment continued to grow at healthy pace of 16% yoy aided by strong growth in home loans (19% yoy) and auto loans (21% yoy) combined forming 70% of the portfolio. Sector-wise, infrastructure (28% yoy, primarily disbursements on sanctioned loans), services (20% yoy) and petroleum (29% yoy) were the key growth drivers. International loan book expanded by 15% qoq largely driven by FCNR (B) deposits related lending. With capital being a constraint in the backdrop of Basel III implementation, SBI is unlikely to grow much faster than the current pace over FY14-16.   

Robust growth in retail term deposits; NIM improves marginally

Domestic deposits grew ahead of advances at 16.7% yoy. The retail term deposits grew by 21% yoy and comprised 44.5% of total domestic deposits as compared to 42.8% in Q3 FY13. Savings deposits grew at a decent pace of 13.5% yoy and remained near 37% of deposits. CASA ratio improved marginally by 30bps qoq to 43.9%.

For the second successive quarter, there was a slight uptick in SBI's blended margin. With international NIM being flat qoq, the global margin improvement was driven solely by NIM expansion of 20bps in the domestic business. Domestic yield on advances improved by 8bps qoq, notwithstanding higher slippages, due to 20bps Base Rate hike taken by the bank on November 11, 2014. Domestic cost of deposits inched-up by 3bps due to change in the mix. SBI's NIM is unlikely to improve further as pricing power remains weak and delinquencies could remain elevated.   

Fee growth improves; one-offs impact opex growth  

Core fee income growth improved to 16% yoy with growth revival seen sequentially in all major fee streams but the loan processing fees. Bank's trading profit stood remained modest at Rs2.4bn on account of challenging rate environment. Overheads increased by 31% yoy on the back of one-time pension provision of Rs6bn (due to change in mortality table) and Rs4.5bn provision for wage revision.

Asset quality deteriorates; substantial slippages in mid corporate and SME segments continue  

Fresh slippages came in at Rs114bn, higher than our estimate of Rs88bn. The delinquency ratio jumped to 4.1% from 3.1% in the previous quarter. About 85% of slippages during the quarter were contributed by mid corporate (delinquency ratio of 12.7%) and SME (delinquency ratio of 5.6%) segments. Their contribution to slippages in Q2 FY14 was at 71% and in Q1 FY14 was at 49% thus implying that asset quality in these segments has deteriorated very sharply through the fiscal. With the bank making provisions against the new NPLs at regulatory rate, the net NPLs witnessed a significant increase of 30bps on sequential basis. Loans worth Rs39bn were restructured taking quarterly impaired assets creation to 153bn. Asset quality outlook remains grim in the backdrop of prolonged economic consolidation and tight rate cycle.

Low valuation to support price unless the operating environment worsens further 

SBI's FY14-16 RoA delivery is estimated to remain depressed averaging 0.8% (but better than other PSBs). While NIM is not expected to improve materially, elevated stress on asset quality is likely to persist in FY15 and end of 'restructured' classification benefit could drive higher slippages/provisioning in FY16. Earnings of the bank are estimated to witness a muted 6% CAGR over FY13-16. However, given inexpensive valuation of the stand-alone bank at 0.8x FY16 P/ABV, the downside from the current price seems limited unless there are negative asset quality shocks in the large corporate segment. Retain 'Market Performer' rating on SBI with 9-12 month target price of Rs1,579.