Sell SBI: Below expectations on higher expenses: Goldman Sachs

Visit http://indiaer.blogspot.com/ for complete details �� ��



State Bank of India (SBI.BO)
Sell
Below expectations on higher expenses

SBI disappoints due to MTM hit, higher expenses
SBI reported flat yoy profit of Rs25bn for 2QFY11, 19%/16% below
GSe/Bloomberg consensus estimates on account of higher expenses and MTM
hits. PBT and Treasury was also 7% below our estimate on higher expenses.



Key takeaways: (1) NII grew 45% yoy on 20% growth in advances and a 25bp
improvement in NIMs qoq, as SBI continued to benefit from CASA and lower
cost of deposits. Management guided for stable to higher NIM going forward vs.
GSe of stable NIM; (2) non-interest income was 5% ahead of GSe on higher fees
and investment income; (3) expenses increased 34% yoy due to higher costs
from branch and employee expansion and Rs3bn of gratuity provision. We find
it difficult to project SBI’s expense number given the volatility between quarters,
which SBI has not explained; (4) NPL provisions were 6% ahead of our estimate,
and SBI took a Rs4.3bn MTM hit on investment book that was not part of our
model; (5) NPLs slippage of Rs44bn or 3% (not including Rs8.54bn from the
State Bank of Indore merger) was higher vs. Rs40bn in 1QFY11 as Corporates,
SME, Agri and Retail all contributed to this increase. Total restructured loan
slippage under RBI scheme stood at 14.5% (vs. Rs6.6bn or 3.9% in 2Q), and
management guided for another Rs5bn-Rs6bn slippage. Gross and net NPL
ratios stood at 3.35% (up from 3.14% qoq) and 1.7%, respectively.

Sell; expensive versus other more profitable PSU banks
We reduce our earnings by 4.4%/0.6%/3.1% due to higher expenses for
FY11/FY12/ FY13. We raise our SOTP-based 12-m TP by 3% to Rs2,665 as we
roll-forward BVPS by one quarter. Our equity value would be Rs2,800, if it
were based on our March 2012E BVPS. We maintain our Sell rating on SBI
given relatively expensive valuations (FY11E standalone P/B of 2.6X, PSU
average: 2.1X) vs. other more profitable PSU banks due to higher NPL
slippages and lower coverage. Upside risk: Higher NIMs.