State Bank of India Not yet out of the woods: Macquarie

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State Bank of India
Not yet out of the woods
Event
 Results 15% below consensus; maintaining Underperform: SBI’s
reported 2Q FY11 net profit of Rs25bn came 15% below consensus and 5%
below our estimate on account of higher credit costs. We are retaining our
Underperform rating and Rs2,300 TP.


Impact
 Asset quality pains – no signs of abating: In our view, the biggest concern
regarding SBI is the increasing rate of delinquencies, which at 2.7% in 2Q
FY11, is one of the highest among large PSU banks. Slippages from
restructured assets have increased four fold in this quarter with the
restructuring principal moratorium coming off and management sounded
bearish on asset quality and expects the current run-rate of slippages to
continue. Higher slippages are very detrimental to SBI’s profitability as it
doesn’t have any provisioning buffer with NPL coverage ratio at 62% and as it
gears up to reach the 70% NPL coverage norm, credit costs could continue to
remain high.

 Opex issues – another area of concern: The sharp rise in opex due to
higher staff expenses, pension and gratuity benefits, etc. continue to worry us.
SBI’s actuarial assumptions are also quite aggressive and any actuarial
revaluation could lead to a large negative surprise, in our view. Adding to that,
with the second pension option being open for its subsidiaries, consolidated
opex and consequently profits could be impacted severely, in our view, as
management has guided that most of the employees of the subsidiaries have
opted for the second pension option.
 NIMs continue to surprise us positively: We believe the encouraging factor
continues to be higher NIMs, which were up an additional 24bps QoQ to
3.42%. The balance sheet is currently stretched with LDR at 80% and as
deposit growth picks up coupled with upward re-pricing of retail deposits, we
expect NIMs to be under pressure going forward.

Earnings and target price revision
 We are paring down earnings for FY11–FY13E by 5% on account of higher
credit costs partly offset by higher NIMs. We are maintaining our TP at
Rs2,300 as our valuation is based on FY12E book value and the impact on
book value due to above EPS changes is limited.

Price catalyst
 12-month price target: Rs2,300.00 based on a Sum of parts methodology.
 Catalyst: Continued stress on asset quality and higher opex.

Action and recommendation
 Premium valuations unjustified, now trades at all time high multiple:
Size alone doesn’t justify premium valuations. SBI is amongst its frontline
peers despite having the weakest return ratios trades at the highest P/BV and
is at a 15% premium to its peers. The one year forward P/BV multiple of 2.2x
is an all-time high multiple for SBI and is two standard deviations above
historical averages. Reiterating Underperform.