SBI- Impressive margins but slippages running high: Edelweiss

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State Bank of India (SBI) reported Q2FY11 NII of INR 81 bn (up 44.7% Y-o-Y, 11%
Q-o-Q) ahead of our estimate (INR 75.5 bn), aided by a 25bps expansion in NIMs
compensating for moderate loan book growth (2.5% Q-o-Q). NIMs benefited from
improvement in lending yields, high CD ratio, decline in cost of deposits (supported
by high CASA and shedding of bulk deposits). Core fees income grew 24% Y-o-Y,
12% Q-o-Q. However, PAT came in at INR 25 bn, below our estimate (INR 30.1 bn)
due to higher: (a) operating costs; (b) loan loss provisions (130bps; 96bps in FY10);
and (c) investment depreciation, off-setting higher NII/other income. Slippages (ex-
State Bank of Indore) stood high at INR 44 bn (2.7%) in Q2FY11 against INR 40 bn
(2.5%) in Q1FY11. Headline asset quality deteriorated with gross NPLs rising 11.4%
Q-o-Q to INR 232 bn (3.35%) and net NPLs rising 4.8% Q-o-Q to INR 116 bn
(1.7%). Provision coverage (including AUCA) improved 208bps sequentially to
62.78%.


􀂄 Impressive margin expansion
Benefitting from 20bps expansion in yield on advances, coupled with 2bps
decline in cost of deposits, SBI’s NIMs expanded sequentially by 25bps to 3.43%
in Q2FY11. Strong expansion in NIMs helped the bank record robust NII of INR
81bn (up 44.7% Y-o-Y, 11% Q-o-Q), ahead of our estimate (INR 75.5 bn),
despite a moderate loan book growth (2.5% Q-o-Q). Supported by high CASA
ratio (47.8%; 48.2% excluding State Bank of Indore) and strategic shedding of
bulk deposits (INR 780 bn outstanding at end of Q2FY11), the bank was able to
contain its cost of deposits (5.25%). Going forward, with credit growth picking
up and CD ratio running high at ~75%, SBI will have to step up its deposit
growth resulting in higher funding costs. Hence, we expect NIMs to trend down
from here; we build in 2.7% NIMs (cal) over FY11-12.

􀂄 Outlook and valuations: Asset quality woes; downgrade to ‘HOLD’
During the quarter, SBI reported a strong top line growth supported by
impressive margin expansion and strong core fees income growth. Further, the
strength of the bank’s liability franchise reflects in strong CASA accretion over
the past few quarters. However, asset quality woes continue, showing up in
higher-than-expected slippages and management’s guidance for higher-thanaverage
slippages over the next few quarters. After adjusting for subsidiaries’
valuation of INR 229, the stock is currently trading at 1.9x FY12E adjusted
(cons.) book, leaving limited upside. Hence, we are downgrading our
recommendation and rating on the stock from ‘BUY’ to ‘HOLD’. On relative
return basis we rate the stock ‘Sector Performer’