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State Bank of India (SBI) is the largest commercial bank in India, with a balance sheet size of
over Rs7t. The bank, along with associate banks, has a network of over 14,000 branches
across India and controls over 18% of the banking business.
SBI's 2QFY11 PAT was flat YoY at Rs25b (14% below our estimate). While NII grew 45% YoY
(7% above our estimate),higher opex and provisions led to lower-than-expected profitability..
Recent Key Highlights:
Margins improved sharply (positive surprise) by 25bp QoQ and 88bp YoY to 3.43% led by
improved yield on loans (up 20bp QoQ) and stable cost of deposit (down 2bp QoQ). CASA
ratio was up 28bp QoQ at 47.8%.
2QFY11 fee income growth was impressive at 40% YoY and 22% QoQ to Rs29.5b.
Operating expenses increased 34% YoY and 19% QoQ. Cost to core income (ex.- trading
profits) ratio increased to 48% from 45% in 1QFY11. SBI provided Rs3b towards increase in
gratuity expenses (total liability of Rs22b, Rs14b provided so far) but it also reversed
Rs1.8b being excess provision towards wage arrears (reversed Rs10.3b so far).
GNPA in absolute terms increased 11% QoQ to Rs232b and NNPA increased 5% QoQ. PCR
including technical write-off was 62.8%. Excluding the impact of SBIn (Rs8.5b additions),
GNPA in absolute terms increased 7% QoQ.
The bank posted a loss of Rs9.7b of SBIn to account for higher pension costs and higher
NPA provisions to improvethe coverage ratio to 70%. This led to 23% YoY drop in consolidated
PAT.
Valuation and view:
Adjusted for life insurance valuation, SBI trades at 1.9x FY12E Consol BV of Rs1,656
and 11.1x FY12E Consol EPS ofRs282. Standalone RoE will be 18.5% in FY12E. Given
the sharp run-up up over the past few days and below estimated earnings, the stock
is likely to correct in the very near term. We see this as a buying opportunity and are
bullish on core operating profitability. Maintain Buy.
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