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SBI: Delinquencies unabated; take profit
• SBI’s 2Q FY11 PAT of Rs25B missed our below-consensus numbers
by 13%: Continued asset quality worries (high delinquencies, elevated
provisions) accompanied by bond losses were the key surprise. Given
the sharp recent run-up (1W 9%, 3M 31%), rich valuations at 14x P/E
(1-yr fwd) and disappointing 2Q results, we advise a switch to ICICI.
• Asset quality remains a worry: Gross incremental delinquency
worsened, up 8% q/q and rising from 2.5% to 2.6% of loans. This drove
NPL provisions up 24% q/q to Rs21B, implying a credit cost of 1.3%.
There were some one-offs (we ignore the SBIndore numbers here) but
flows of fresh NPLs, both from restructured and the standard book,
continues to be worryingly elevated.
• Strong operating performance: NIM improvement continued unabated
and crossed 3.4% for 2Q FY11 (3.2% in 1Q FY11, 2.4% in 2Q10), aided
by a PLR hike this quarter. We think NIM improvement is over, and
expect it to hold steady in the near term. Fee growth continues to be
another area of improvement, with 40% y/y growth in 2Q.
• Opex should start to improve: Opex growth remains high, partly from
non-recurring staff cost charges from new gratuity rules. We think opex
growth will start to moderate, with the caution that it is unlikely to
improve dramatically given the bank’s ambition of aggressive branch
expansion.
• Switch to ICICI: SBI is improving its operating performance, but is
struggling with asset quality, in our view. The stock has had a great run,
and we think valuations are rather full at 14x P/E and 2x P/BV (1-yr
fwd). We stay Neutral and prefer ICICI, due to consensus upgrades on
credit costs. ICICI’s premium P/BV of 2.6x is supported by improving
and superior ROAs + better asset quality, in our view.
Delinquencies unabated; take profit
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