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State Bank of India (SBIN)
Banks/Financial Institutions
Strong margins neutralize provisioning impact . SBI reported a strong quarter on
margins, which further improved by 25 bps over last quarter to 3.43%, resulting in an
NII growth of 44% yoy. However, slippages continued to remain high (at `44bn, 2.7%)
and were somewhat disappointing resulting in higher provisions and lower profits. We
expect the stock price to correct in the near term, as result expectations were running
high coupled with a very strong price performance in recent times. Retain positive view.
Stock trades at 2xFY2012E PBR for core banking business. BUY with a TP of `3,500.
Earnings cushioned by strong margins despite higher provisioning impact
SBI is an ideal bank at times of tight systemic liquidity and it continues to improve its liability profile
by mobilizing CASA deposits at a very aggressive pace, resulting in steady funding costs and high
margins. The management appeared very confident of sustaining NIMs at current elevated levels
due to its improved funding mix. On NPLs, slippages have remained high even during this quarter
resulting in larger provisions. We believe that slippage will remain high over next few quarters, but
recoveries/upgradations will pick up over time. We expect provisions to remain high as its needs to
catch up with regulatory requirements and likely higher slippages. However, we expect higher
margins to neutralize the impact of higher provisions. We reduce earnings by 1% in FY2011E, but
increase earnings by 6-8% for FY2012E and FY2013E, factoring in the State Bank of Indore
merger, higher margins and stable cost-income ratios. Retain BUY with a TP of `3,500.
Margins continue to impress at 3.4% led by higher lending yields
Margins further improved by 25 bps qoq to 3.43%, on back of rising lending yields (20 bps qoq to
9.5%) coupled with stable funding costs (at 53%). Credit-deposit ratio for the quarter remained
flat at 80% (domestic CD ratio at 75%). CASA mobilisation continued to remain very strong with
savings deposit growth of 31%. CASA% at 47% gives strong comfort on its ability to sustain
margins at higher levels. Management guides of sustaining margins at current levels, on back of a
reasonable pricing power owing to tighter liquidity coupled with stable funding costs.
Growth in line with the industry - aided by State bank of Indore merger
Overall loans grew by 19.5% yoy (broadly in line with industry) and 4.4% qoq to `6.9 tn as of
September 2010; growth for the quarter led by the merger with SBI Indore. Retail continues to
dominate growth (housing, auto and education loans) while international loans were subdued
mainly due to negative impact of currency movement. Growth in mid corporate/SME segment has
improved compared to 1QFY11 at 20% levels. However, focus on shedding bulk deposits and
excess liquidity in the balance sheet resulted in deposits growth subdued at 11% yoy and 5% qoq
(mainly due to SBI Indore) at `8.5 tn.
Savings deposits growth commendable; maintained CASA share at 48% qoq
For the quarter, SBI has maintained its CASA ratio at 48% as of September 2010. However,
the bank continues to impress on mobilizing savings deposits - it is adding about `80 bn of
savings deposits every month, resulting in savings deposits growing by 32% yoy. Growth in
current account deposits has been slower at 14% yoy.
Slippages rise across all segments; rise in NPL partly due to merger
2QFY11 saw a sharp rise in slippages at `44 bn (2.7% annualized) with about 4% slippages
each in SME/agri, select corporate and restructured loans. Slippages for the quarter include
`2.5 bn for Dubai World, ` 6 bn from restructured SME loans and `2.1 bn from agriculture.
For the quarter gross NPLs increased by 11% qoq to `232 bn (3.4% of loans) while net NPLs
increased by 5% qoq to `116 bn (1.7% of loans). SBI Indore resulted in an addition of ` 8.5
bn or 35% of the incremental change in NPLs for the quarter.
Loan loss provisions remain high; slippage from restructured loans at 15%
Provision coverage (including write-off) improved by about 200 bps to 63% in September
2010 from 61% in June 2010 while has increased by 320 bps qoq to 50% ex write-off.
Loan loss provisions for the quarter remained high at 1.3% compared to 1.1% in 1QFY11.
The bank wrote off nearly ` 8 bn of loans in the current quarter. We see provisions declining
from FY2012 as slippages eases from current levels as well as the bank complete meeting its
regulatory requirements. The bank’s outstanding restructured book was at `307 bn (4.5%
of loans). Slippage from the restructured book (special dispensation) has increased to 14.5%,
emerging mainly from SME portfolio. While provisions continues to remain higher, the
strong margins of over 3.3% is currently providing adequate cushion without seriously
impairing return ratios.
Cost-income ratio at 48%; one-offs continue
Cost-income ratio for the quarter was at 48%, ahead of expectations, as the bank made
higher retirement provisions while non-staff expenses continues to remain at elevated levels.
The bank provided `3 bn for revised gratuity benefits during the quarter (1HFY11 at `14 bn
against an estimated liability of `22 bn). Revised pension benefit for SBI Indore was taken
through the subsidiaries profits at the time of merger. Hence, there is unlikely to be a
material impact going forward. We are building improvement in cost-income ratio at 46% in
FY2012 to factor 1) Completion of peak infrastructure investments 2) revision in staff costs
reported in FY2010-11 (catch up to 17.5% wage revision and revised retirement benefits)
State Bank of Indore merger impacts consolidated earnings
As on the date of merger, SBI Indore has taken charges to its P&L to align the staff
retirement benefits to SBI and meet regulatory provision coverage ratios. SBI Indore reported
a loss of `9 bn (`6 bn liability was estimated for revised pension benefits) in the current
quarter to account for these differences. This has resulted in consolidated earnings for the
quarter being lower than stand-alone earnings. Advances declined to `216 bn compared to
`232 bn in June 2010. Gross NPLs have increased to ` 8.5 bn from `5.8 bn in June 2010.
Other key financial highlights in 2QFY11
Treasury income was `1.97 bn (down 64% yoy). Fee income was at `29.5 bn — a strong
growth of 40% yoy mainly due to higher transaction banking fees.
Consolidated earnings declined by 22% yoy to `24.3 bn for 2QFY11 mainly due to higher
charges taken for the merger with SBI Indore. Consolidated NII grew 46% to `115 bn. SBI
Life has recorded a profit of `1.03 bn for 2QFY11 while SBI Capital Markets posted a
profit of `1.1 bn.
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