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State Bank of India
Strong 2Q core earnings; Buy
on positive risk-return
Raise PO to 3800, Buy on positive risk-return
We raise our PO to Rs3800 (US$165 on GDR). While the stock is likely to see
some correction post higher slippages (NPLs) in 2Q, we recommend buy on
declines, as we believe the stock trading at +2.1-2.2x FY12 (banking biz.) can
trade up to +2.3-2.4x FY12 adj. book as 1) we reckon NPLs have peaked,
although at elevated levels; 2) still see visibility of earnings growth of +26/45% for
FY11/12 driven by topline and fees and; 3) RoEs for banking business (SBI and
associates) rising to +22% (SBI RoEs at +20%) by FY12. Adding Rs283 (10%
Holdco disc.) for non-bank subs (maintain) we get our new PO of Rs3800.
2QFY11: Earnings flat yoy; +15% below est on higher prov.
SBI’s 2QFY11 earnings at Rs25bn, flat yoy were +15% below estimates on higher
provisions owing to bank shoring up its provision cover and MTM on investments.
Core earnings were 3% ahead of est. on topline (8% ahead) and fees (+15%
ahead). Topline (NII) grew 45% yoy on +19% volume growth and margins rose
88bps yoy (25bps qoq) to 3.4%. Core fee growth at 40% yoy; CASA up +680bps
yoy to ~48%). Opex up 34% yoy driven by gratuity (Rs3bn), higher overall
contributions post new wages and, branch and employee ramp-up yoy.
NPL formation: rise, but includes S.Bk.Indore and one-off’s
NPL formation was higher at Rs53bn as partly was driven by integration of St. Bk
of Indore (Rs8.5bn). Besides, agri-relief, slippages from restructuring and, Dubai
World also added +Rs11bn, which we believe are one-offs. We expect the runrate
to slip to ~Rs35bn levels going ahead. Restructured relapse at 12.7%
(aggregate). We model in gross accretion in FY11 at +Rs165bn vs. Rs118bn in
FY10 and credit costs at ~110bps vs. 83bps in FY10. Net NPL’s forecast to fall to
~1.0% by FY12, hence, asset quality remains manageable.
Earnings flat yoy on higher provisions, but core earnings very strong
SBI’s 2QFY11 earnings at Rs25bn, flat yoy were +15% below estimates on higher
provisions owing to bank shoring up its provision cover and MTM on investments.
Core earnings were 3% ahead of est. on topline (8% ahead) and fees (+15%
ahead).
Topline (NII) grew 45% yoy on +19% volume growth and margins rose 88bps yoy
(25bps qoq) to 3.4%. Loan growth was at ~19.5% yoy and adjusted for State
Bank of Indore loan growth at 16% for SBI standalone. Furthermore, rising LDRs
to +81% now vs. 75% in 2QFY10 also helped topline growth. Loan growth was
driven by ~16% yoy growth in corporate segment and adjusted for CP
investments; corporate loan growth was at ~22% yoy. +11% growth in
international segment and 19% yoy if seen in dollar terms, +23% in mid-corporate
and SME segment growth was 16% yoy. Retail loan grew driven by mortgage and
autos- (mortgage growth at ~27%; education loan growth at 31% yoy and auto at
~52%). SBI has become the leader in most of the retail segments. SME and Midcorporate
book grew modest driven by a conscious strategy and macro scenario.
The other major positive was core fee (CEB and Forex) income, which has
increased by +40% yoy. Sustained rise in core fees driven by plugging the
leakages.
Opex was up 34% yoy driven by gratuity (Rs3bn), higher overall contributions
post new wages and, branch and employee ramp-up yoy.
Asset quality- Higher than estimated NPL formations, but few one-offs
NPL formation was higher at Rs53bn partly driven by agri-relief, slippages from
restructuring and, Dubai World totaling +Rs11bn, which we believe are one-offs.
Also, St. Bk of Indore got integrated, which contributed Rs8.5bn to slippages In
2Q. We expect the run-rate to slip to ~Rs35bn levels going ahead. Restructured
relapse at 12.7% (aggregate). We model in gross accretion in FY11 at +Rs165bn
vs. Rs118bn in FY10 and credit costs at ~110bps vs. 83bps in FY10. Net NPL’s
forecast to fall to ~1.0% by FY12, hence, asset quality remains manageable.
36% of total gross NPLs are corporate, 21% SME, 20% retail, 15% agriculture
and the balance 8% from international. SBI’s coverage (specific) stands at ~50%
(vs. 43% in 2QFY10), but including technical write-offs (per RBI definition) is at
~63% (vs. 59% in 2QFY10).
According to SBI, total restructured loans are at ~Rs310bn at gross level. Fresh
addition is only to the tune of Rs6.6bn in 2QFY11. Total re-lapse from
restructured book stands at ~12.3% of total (including RBI scheme) and are
already captured in NPL accretion and largely in-line with expectations.
Performance of SBI associate banks and key subsidiaries
We highlight below key subsidiaries and associate banks performance during FY10:
Associate Banks: Net Interest Income registered a healthy increase of
+55% yoy in 2QFY11. NIMs improved +80bps yoy to reach 3.3% in 2QFY11.
Net Profit grew 22% in 2QFY11 (16% in 1H) yoy on account of higher
provisioning for NPAs. But, operating profit for associate banks was up +40%
yoy. Loans have grown ~17% yoy and deposits at ~16% yoy as on Sep’10,
with CASA at ~32%. Gross NPLs at ~2.4% and net NPLs at 1.1%, with total
prov. cover at ~66%.
SBI Life has recorded a profit of Rs1.6bn in 2QFY11 (Rs2.2bn in 1H), a yoy
growth of +85%.
SBI Caps has posted a PAT of Rs1.1bn in 2QFY11 (Rs2.6bn in 1H), a yoy
growth of +180%.
SBI cards & payment services recorded a net profit of Rs760mn in 2QFY11
(vs. Rs32mn in 1QFY11) as against a net loss of Rs0.9bn in 2QFY10.
Cut earnings by ~2%; but strong core earnings
We have tweaked our earnings by ~2% each for FY11/12 to factor in higher
provisioning and operating costs but our earnings cut lower owing to very strong
core operating earnings (topline and fees). We estimate FY11 earnings growth to
be +26% in FY11 driven by topline (rising margins) and fees. Further, FY12
earnings estimated to grow by +45% partly driven by unwinding of credit costs.
Operating profit growth at +55/25% through FY11/12
Operating earnings (pre-provision profits excluding trading profits) growth to be
much stronger at +55% in FY11 and +25% in FY12 v/s 6% in FY10. This is driven
by robust top line (net interest income) growth of +33-34% in FY11 owing to pick
better margins (on a yoy basis). Further, the C-I ratio should trend down – owing
to better revenues.
NPL accretion at Rs+165bn est. in FY11
We estimate accretion levels in FY11 at +Rs165bn (2.6% -1-yr lag) vs. Rs118bn
in FY10. Hence, we still forecast a +30% rise in headline gross NPL’s in FY11
after factoring in recoveries (absolute levels). Moreover, net accretion (additions –
recoveries + upgradations) still estimated at Rs79bn vs. Rs58bn in FY10.
We are, in our est., modeling in credit costs at ~110bps resulting in lower levels of
net NPLs (%) and reported provision cover rising to 57% in FY11 (from 44% in
FY10), excluding technical write-offs (incl. this cover at +67-68% by FY11). Note,
SBI has until Sep’11 to achieve 70% cover. Further, our discussions with SBI
reveal that NPL recovery and upgradation is also gaining momentum, which
could surprise.
SOTP – Maintain non-bank subs at Rs283/shr.
SBI also derives value from many of its non-banking subsidiaries, principally the
life insurance venture followed by its asset management amongst others. Our
value is based on our new valuation approach, combing the “derived” embedded
value and assigning a lower multiple (9x for FY12) for “new” biz. We believe
players like SBI are in a very strong position on economies of scale, already
reporting profits, and adopting a bancassurance model, which will give itself an
edge vis-à-vis other players in this uncertain scenario.
Accordingly, we estimate gross and net NPLs at 3.3% and 1.4%, resp.
Valuing ‘total banking’ biz.’
Further, if we were to even consolidate the associate banks, the combined
adjusted BV of the entire banking biz. is estimated at Rs1179 for FY11 and
Rs1465 for FY12 with ROE forecast at +22% by FY12 for the banking business.
The banking biz. (pre-money) trading at +2.1-2.2x FY12 book can also arguably
trade at +2.3-2.4x FY12 adj. BV implying a price of Rs3517, adding Rs283 (10%
holding discount) for non-bank subs we get our PO of Rs3800.
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