State Bank of India – 2QFY2011 Result Update - Angel Broking

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  State Bank of India – 2QFY2011 Result Update

Angel Broking maintains an Accumulate on State Bank of India with a Target Price of Rs3,504.

For 2QFY2011, SBI’s standalone net profit posted marginal growth of 0.5% yoy

but declined by 14.2% qoq, below our as well as street estimates on account of

higher slippages and consequent higher provisioning expenses. However,

operating performance was above expectations, led by a 25bp qoq increase in

NIM and strong fee income growth. We maintain Accumulate on the stock.

Robust operating performance; asset quality disappoints: During the quarter, net

advances increased by 4.2% qoq and 19.0% yoy, underpinned by strong growth

in retail and mid-corporate loans. Deposits grew by 4.9% qoq and 10.7% yoy on

the back of healthy 27.7% growth in CASA deposits. The CASA ratio improved

marginally by 30bp qoq to 47.8%. On the back of growth in CASA deposits,

shedding of bulk deposits and higher yield on advances, reported NIM improved

by 25bp qoq and 113bp yoy to 3.43%. On the asset quality front, the bank faced

large slippages of `4,412cr (annualised slippage ratio of 2.8% compared to 2.2%

in FY2010). Gross and net NPAs went up by 11.4% qoq and 4.8% qoq,

respectively. NPA provision coverage ratio including technical write-offs improved

to 62.8% from 60.7% as of 1QFY2011.

Outlook and valuation: Due to strong CASA with market share gains and high fee

income, SBI’s core RoEs have improved over the past few years and, unlike most

other PSBs, actual FY2010 RoEs are below core levels due to low asset yields,

providing scope for upside as yields normalise to sectoral averages. We have a

positive outlook on the bank in light of its dominant position and reach, strong

growth and superior earnings quality. The stock has been re-rated, considering its

robust operating performance over the past several quarters and is trading at

2.5x FY2012E ABV (including subsidiaries) v/s its five-year range of 1.3–2.2x and

median of 1.7x. We maintain Accumulate with a Target Price of `3,504.

Performance of associates and subsidiaries

􀂄 Advances and deposits of associate banks recorded yoy growth of 16.8% and

15.6%, respectively. In 2QFY2011, gross and net NPAs stood at 2.4% and

1.1%, respectively, compared to 2.1% and 1.0%, respectively, in 1QFY2011.

􀂄 Operating profit of associate banks increased by 36.4% yoy to `1,636cr from

`1,199cr. Net profit of associate banks also recorded healthy growth of 21.6%

yoy, mainly on account of higher provisioning for NPAs, taking the provision

coverage ratio to healthy 65.8%.

􀂄 SBI Life earned PAT of `217cr against PAT of `116cr, registering yoy growth of

86.8%. In terms of New Business Premium, the company is ranked no. 1

amongst private insurance companies.

􀂄 SBI Capital Markets posted PAT of `266cr during 2QFY2011, registering

robust yoy growth of 184%. Growth in fee income stood at robust 57.0% yoy.

􀂄 SBI Cards and Payment Services recorded profit for the second consecutive

quarter, earning PAT of `8cr compared to loss of `91cr in 2QFY2010.

􀂄 SBI DFHI recorded gross trading income of `18cr, which is the highest in the

last three years.

􀂄 SBI Pension Fund’s AuM recorded growth of 34% over FY2010 to `3,061cr.

􀂄 The overall SBI Group recorded a 22.2% yoy decline in net profit to `2,364cr

from `3,051cr during 2QFY2010.

Investment arguments

Improving savings market share

Up to FY2007, the bank witnessed a significant decline in CASA market share with

private sector banks pursuing aggressive branch expansion. However, the bank’s

market share of savings deposits has expanded by a substantial 270bp to 23.2%

during FY2007–10 (one of the few PSBs to do so), driven by relatively faster branch

expansion (9.5% CAGR v/s 2–5% for most PSBs) leveraging its tremendous trust

factor in the country.

Strongest fee income among PSU banks

SBI has a relatively strong share of fee income, owing to its strong corporate and

government business relationships. During FY2010, the bank continued its

dominance with non-interest income/assets at 1.3% (highest among PSU banks).

Asset quality concerns peaking

SBI has a gross NPA ratio of 3.4% and net NPA ratio of 1.7%, leading to a low

provision coverage ratio of 62.8% (including technical write-offs) and restructured

loans of ~`30,650cr, constituting 42.4% of its net worth, which is lower than the

peer average. We have factored in a slippage ratio of 2.8% for FY2011E and

2.4% for FY2012E (higher than slippage ratio in FY2010, considering higher

slippages in 1HFY2011). However, going forward, recoveries and upgrades are

expected to pick up strongly, thereby helping the bank in containing the level of

provisioning burden. Accordingly, we expect NPA provisions/average assets to

come down to 0.5% in FY2012E from 0.8% in FY2011E.

Outlook and valuation

We expect SBI to outperform on account of its stronger core competitiveness and

likelihood of credit and CASA market share gains, driven by strong capital

adequacy and robust branch network of more than 12,000 branches. The bank’s

sustainable CASA ratio of 45%+ is expected to lead to relatively stronger earnings

growth in a rising interest rate environment.

Due to strong CASA with market share gains and high fee income, SBI’s core RoEs

have improved over the past few years and, unlike most other PSBs, actual FY2010

RoEs are below core levels due to low asset yields, providing scope for upside as

yields normalise to sectoral averages.

We have revised our target price downwards by `62 to `3,504 (earlier `3,566), to

factor in the impact on reserves post the State Bank of Indore merger.

The stock has been re-rated, considering its robust operating performance over the

past several quarters and is trading at 2.5x FY2012E ABV (including subsidiaries)

v/s its five-year range of 1.3–2.2x and median of 1.7x. We maintain Accumulate

on the stock with a Target Price of `3,504.