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For 3QFY2011, SBI’s standalone net profit posted growth of 13.1% qoq and
14.1% yoy to `2,828cr, slightly below our estimate of `2,911cr on account of
higher effective tax rate. Sequential NIM expansion coupled with lower slippages
was the key highlight of the results. We maintain our Buy recommendation on the
stock.
Robust operating performance; asset quality shows signs of stabilising: During
3QFY2011, the bank’s net advances grew by 6.7% qoq and 21.3% yoy,
underpinned by strong growth in large corporate segment loans (28.2% yoy),
retail loans led by auto (52.2% yoy), education (27.2% yoy) and home (22.5%
yoy) as well as SME loans (20.6% yoy). Deposits recorded growth of 14.0% yoy,
driven by healthy CASA deposits growth of 27.7% yoy. The bank’s CASA ratio
improved by 40bp qoq to 48.2%. On the back of growth in CASA deposits,
shedding of bulk deposits and higher yield on advances, reported NIM improved
by 18bp qoq and 131bp yoy to 3.61%. On the asset quality front, the bank
showed signs of stabilisation with lower slippages (annualised slippage ratio of
2.0% compared to 2.7% in 1HFY2011). Gross and net NPAs went up marginally
by 1.0% qoq and 0.8% qoq, respectively. NPA provision coverage ratio including
technical write-offs improved to 64.1% from 62.8% as of 2QFY2011.
Outlook and valuation: Due to strong CASA 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. At the CMP,
the stock is trading at 2.0x FY2012E ABV (without adjusting value of subsidiaries).
We believe going forward, SBI has ample levers to deliver healthy operating
income growth even in the rising interest rate environment as well as manage its
provisioning requirements. We maintain a Buy recommendation on the stock,
with a Target Price of `3,490.
During the quarter, deposits grew to `8,78,979cr from `7,70,985cr in 3QFY2010,
recording yoy growth of 14.0%, driven by healthy CASA deposits growth of 27.7%
yoy and retail term deposits grew by 5.3% yoy. The bank continued to shed highcost
bulk deposits by 3.2% yoy. Current deposits increased by 19.1% yoy, while
savings deposits rose by 29.9% yoy. CASA ratio improved further by 40bp qoq to
48.2% from 47.8% in 2QFY2011.
NIM continues to improve sharply
The bank’s reported NIM has been witnessing an upward trend since hitting a low
of 2.30% in 1QFY2010, from which level it has improved by 131bp to 3.61% in
3QFY2011. Even on a sequential basis, NIM expanded by a healthy 18bp on
account of the 8bp increase in yield on advances and 5bp decline in cost of
deposits. NIM improved owing to the improvement in CASA deposits, which grew
by 27.7% yoy driven by strong 29.9% growth in savings account deposits and
shedding of bulk deposits. As a result, NII increased by a healthy 11.5% qoq and
43.3% yoy to `9,050cr in 3QFY2011.
Muted non-interest income
Non-interest income declined by 17.3% qoq and 1.5% yoy on account of the
49.6% yoy decline in profit on sale of investments. Non-interest income excluding
profit on sale of investments grew by 5.6% yoy. Fee income adjusting for ATM
interchange fees for 9MFY2010 (which was accounted for in 3QFY2010 itself)
increased by 21.3% yoy on account of growth in commission from the government
business, loan processing, under writing and upfront fees, LC/BG charges, and
cross selling. Miscellaneous other income declined by 23.3% qoq and 37.9% yoy
to `208cr likely on account of lower recoveries from written-off accounts.
Lower slippages, higher restructuring
During 3QFY2011, the bank’s asset quality showed signs of stabilisation with
slippages falling to `3,153cr compared to average quarterly slippages of
~`4,250cr during 1HFY2011. The annualised slippage ratio declined to 2.0%
from 2.6% in 1QFY2011 and 2.8% in 2QFY2011. Even Net NPA growth was
marginal at 0.8% compared to ~7.0% average qoq growth in the past five
quarters. Agriculture (`260cr) and Retail (`192cr) were the key contributors to the
net increase in gross NPAs, while the SME segment’s Gross NPAs declined by
`195cr and from the corporate segment fell by `68cr sequentially. The provision
coverage ratio including technical write-offs improved to 64.1% from 62.8% in
2QFY2011.
The cumulative restructured assets under the RBI Special Dispensation Scheme
stood at `18,395cr as of 3QFY2011, out of which `450cr slipped during the
quarter, taking cumulative slippages from this restructured book to `2,885cr
(15.7% of the restructured loan book). Management had in 2QFY2011 indicated
total slippages from these restructured advances to be ~17.5% (indicating further
slippages of ~`500cr in the coming quarters) out of which `450cr slipped during
3QFY2011. The bank’s restructured loans outside the RBI scheme stood at
`14,355cr. Cumulative slippages from these loans stood at 10.7%.
Provisioning expenses declined by 21.7% qoq on the back of the 24.5% decline in
provisions for NPAs. The provisions were also ~12% lower than our estimates.
The bank did not make provisions for teaser loans based on its view that its home
loans were not falling within the definition of teaser loans. The amount of such a
provision is estimated in the range of ~`400-600cr. In case the RBI does not
uphold this view, the bank’s bottom-line estimates would have a corresponding
downside. In any case, it should be noted that this provisioning does not indicate a
true economic loss and is a one-time hit (for instance, HDFC adjusted the same
against its reserves). Also, we have built in ~`3,000cr of provisioning expenses for
4QFY2011 as compared to actual expenses of `2,050cr in 3QFY2011, providing
a margin of safety from any increase in the provisioning burden.
Lower staff costs aid improvement in cost-to-income ratio
Total operating expenses increased by 10.6% yoy on the back of the 12.6% yoy
growth in staff expenses and 7.3% increase in other operating expenses. The bank
made provision of `140cr towards the gratuity liability in 3QFY2011. The
projected total liability on account of gratuity was estimated at `2,200cr, which has
been revised downwards to `1,900cr on account of a higher discounting rate.
Accordingly, the bank made a provision of `140cr during the quarter taking the
total provisions for gratuity to `1,540cr.
To factor in the remaining charge of ~`360cr on this account, we have increased
our opex estimates for 4QFY2011. However, the pension liability amount is yet to
crystalise, upon which there could be further revisions in our estimates. Payment to
employees increased by 11.4% yoy on account of wage revisions and strong
employee recruitments over the past one year. Other operating expenses recorded
a 7.3% yoy increase. The bank incurred `72cr for setting up of 565 branches and
`256cr for opening 2,951 new ATMs during CY2010. The cost-to-income ratio for
3QFY2011 stood at 45.3%, down from 47.5% during 2QFY2011 and 52.3%
during 3QFY2010.
Comfortable capital adequacy
The bank has continued to maintain comfortable capital adequacy ratio (CAR) of
above 13%. As of 3QFY2011, overall CAR stood at 13.2%, with tier-1 constituting
more than 72.9% of the total CAR. The bank plans to launch more retail bond
issues in 4QFY2011. The bank plans to make a rights issue over the next few
months to sustain its capital adequacy at comfortable levels.
The government has also approved diluting its stake in the bank to 51% from the
existing stipulated dilution level of 55%. This provides significant headroom for
dilution for the existing government holding of 59.4%.
Performance of associates and subsidiaries
Advances and deposits of associate banks recorded yoy growth of 18.4% and
12.7%, respectively. In 3QFY2011, gross and net NPAs stood at 2.5% and
1.1%, respectively, compared to 2.4% and 1.1%, respectively, in 2QFY2011.
Operating profit of associate banks increased by 18.2% yoy to `1,887cr from
`1,597cr. Net profit of associate banks also recorded healthy growth of 15.4%
yoy to `864cr from `748cr. Provision coverage ratio (including AUCA) stood
at 68.0%.
SBI Life clocked PAT of `301cr registering yoy growth of 51%. Of the total
market share of 27.9% held by private insurance companies, SBI Life has a
market share of 18.3%.
SBI Capital Markets posted PAT of `321cr during 3QFY2011, registering a
robust yoy growth of 181%.
SBI Cards and Payment Services issued 3 lakh cards during FY2011, a growth
of 74%. Provisions /write offs declined by 57% yoy.
SBI DFHI recorded PBT of `69cr. The marketing units contributed income of
`8cr to overall trading income.
SBI Pension Fund’s AuM recorded growth of 48% over FY2010 to `3,394cr.
During 3QFY2011, the overall SBI Group recorded a 12.3% yoy growth in net
profit to `3,710cr (`3,305cr).
Investment arguments
Improving savings market share
Up to FY2007, the bank witnessed a significant decline in CASA market share with
the 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.
Initiatives for bolstering the already strong CASA franchise
The bank enjoys a strong liability franchise through a robust CASA deposits base. It
has adopted innovative ways to further bolster the base, such as:
The bank has entered into a joint venture agreement with Bharti Airtel to make
banking services available through mobile banking;
The “Bank on Bike” has been launched in Andhra Pradesh wherein the
unbanked villages are served with help of a bike, laptop and data card; and
Premium Banking Centre launched in September 2010 caters the HNI
requirements in Hyderabad’s Kohinoor Banjara, which provides premium
services such as lockers, 24-hour banking, etc.
Strongest fee income among PSU banks
SBI has a relatively strong share of fee income, owing to its strong corporate and
government business relationships. In 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 3.2% and net NPA ratio of 1.6%, leading to a low
provision coverage ratio of 64.1% (including technical write-offs) and restructured
loans of ~`32,750cr, constituting 43.6% of its net worth. However, as witnessed in
3QFY2011, slippages are expected to remain lower, while recoveries and
upgrades are also expected to pick up strongly, thereby helping the bank in
containing its provisioning burden. Accordingly, we expect NPA provisions/average
assets to come down to 0.5% in FY2012 from 0.8% in FY2011.
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 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. At the CMP, the stock is trading at 2.0x FY2012E
ABV (without adjusting value of subsidiaries). We believe going forward, SBI
has ample levers to deliver healthy operating income growth even in the rising
interest rate environment as well as manage its provisioning requirements. We
maintain a Buy recommendation on the stock, with a Target Price of `3,490.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
State Bank of India – 3QFY2011 Result Update
Angel Broking maintains a Buy on State Bank of India with a Target Price of Rs. 3,490
For 3QFY2011, SBI’s standalone net profit posted growth of 13.1% qoq and
14.1% yoy to `2,828cr, slightly below our estimate of `2,911cr on account of
higher effective tax rate. Sequential NIM expansion coupled with lower slippages
was the key highlight of the results. We maintain our Buy recommendation on the
stock.
Robust operating performance; asset quality shows signs of stabilising: During
3QFY2011, the bank’s net advances grew by 6.7% qoq and 21.3% yoy,
underpinned by strong growth in large corporate segment loans (28.2% yoy),
retail loans led by auto (52.2% yoy), education (27.2% yoy) and home (22.5%
yoy) as well as SME loans (20.6% yoy). Deposits recorded growth of 14.0% yoy,
driven by healthy CASA deposits growth of 27.7% yoy. The bank’s CASA ratio
improved by 40bp qoq to 48.2%. On the back of growth in CASA deposits,
shedding of bulk deposits and higher yield on advances, reported NIM improved
by 18bp qoq and 131bp yoy to 3.61%. On the asset quality front, the bank
showed signs of stabilisation with lower slippages (annualised slippage ratio of
2.0% compared to 2.7% in 1HFY2011). Gross and net NPAs went up marginally
by 1.0% qoq and 0.8% qoq, respectively. NPA provision coverage ratio including
technical write-offs improved to 64.1% from 62.8% as of 2QFY2011.
Outlook and valuation: Due to strong CASA 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. At the CMP,
the stock is trading at 2.0x FY2012E ABV (without adjusting value of subsidiaries).
We believe going forward, SBI has ample levers to deliver healthy operating
income growth even in the rising interest rate environment as well as manage its
provisioning requirements. We maintain a Buy recommendation on the stock,
with a Target Price of `3,490.
Advances grow in line with industry, deposits growth lags
During 3QFY2011, the bank’s net advances grew by 6.7% qoq and 21.3% yoy to
`7,26,649cr, underpinned by strong growth in large corporate segment loans
which grew by 28.2% yoy and retail loans led by auto (52.2% yoy), education
(27.2% yoy) and home (22.5% yoy) as well as SME loans (20.6% yoy). On a
sequential basis, strong growth momentum was witnessed in the large corporate
segment (13.7% qoq), SME loans (10.6% qoq) and in auto loans (12.5% qoq). The
bank’s loan book continues to be well diversified with no segment accounting for
more than 21% of the total loan book.
During the quarter, deposits grew to `8,78,979cr from `7,70,985cr in 3QFY2010,
recording yoy growth of 14.0%, driven by healthy CASA deposits growth of 27.7%
yoy and retail term deposits grew by 5.3% yoy. The bank continued to shed highcost
bulk deposits by 3.2% yoy. Current deposits increased by 19.1% yoy, while
savings deposits rose by 29.9% yoy. CASA ratio improved further by 40bp qoq to
48.2% from 47.8% in 2QFY2011.
NIM continues to improve sharply
The bank’s reported NIM has been witnessing an upward trend since hitting a low
of 2.30% in 1QFY2010, from which level it has improved by 131bp to 3.61% in
3QFY2011. Even on a sequential basis, NIM expanded by a healthy 18bp on
account of the 8bp increase in yield on advances and 5bp decline in cost of
deposits. NIM improved owing to the improvement in CASA deposits, which grew
by 27.7% yoy driven by strong 29.9% growth in savings account deposits and
shedding of bulk deposits. As a result, NII increased by a healthy 11.5% qoq and
43.3% yoy to `9,050cr in 3QFY2011.
Muted non-interest income
Non-interest income declined by 17.3% qoq and 1.5% yoy on account of the
49.6% yoy decline in profit on sale of investments. Non-interest income excluding
profit on sale of investments grew by 5.6% yoy. Fee income adjusting for ATM
interchange fees for 9MFY2010 (which was accounted for in 3QFY2010 itself)
increased by 21.3% yoy on account of growth in commission from the government
business, loan processing, under writing and upfront fees, LC/BG charges, and
cross selling. Miscellaneous other income declined by 23.3% qoq and 37.9% yoy
to `208cr likely on account of lower recoveries from written-off accounts.
Lower slippages, higher restructuring
During 3QFY2011, the bank’s asset quality showed signs of stabilisation with
slippages falling to `3,153cr compared to average quarterly slippages of
~`4,250cr during 1HFY2011. The annualised slippage ratio declined to 2.0%
from 2.6% in 1QFY2011 and 2.8% in 2QFY2011. Even Net NPA growth was
marginal at 0.8% compared to ~7.0% average qoq growth in the past five
quarters. Agriculture (`260cr) and Retail (`192cr) were the key contributors to the
net increase in gross NPAs, while the SME segment’s Gross NPAs declined by
`195cr and from the corporate segment fell by `68cr sequentially. The provision
coverage ratio including technical write-offs improved to 64.1% from 62.8% in
2QFY2011.
The cumulative restructured assets under the RBI Special Dispensation Scheme
stood at `18,395cr as of 3QFY2011, out of which `450cr slipped during the
quarter, taking cumulative slippages from this restructured book to `2,885cr
(15.7% of the restructured loan book). Management had in 2QFY2011 indicated
total slippages from these restructured advances to be ~17.5% (indicating further
slippages of ~`500cr in the coming quarters) out of which `450cr slipped during
3QFY2011. The bank’s restructured loans outside the RBI scheme stood at
`14,355cr. Cumulative slippages from these loans stood at 10.7%.
Provisioning expenses declined by 21.7% qoq on the back of the 24.5% decline in
provisions for NPAs. The provisions were also ~12% lower than our estimates.
The bank did not make provisions for teaser loans based on its view that its home
loans were not falling within the definition of teaser loans. The amount of such a
provision is estimated in the range of ~`400-600cr. In case the RBI does not
uphold this view, the bank’s bottom-line estimates would have a corresponding
downside. In any case, it should be noted that this provisioning does not indicate a
true economic loss and is a one-time hit (for instance, HDFC adjusted the same
against its reserves). Also, we have built in ~`3,000cr of provisioning expenses for
4QFY2011 as compared to actual expenses of `2,050cr in 3QFY2011, providing
a margin of safety from any increase in the provisioning burden.
Lower staff costs aid improvement in cost-to-income ratio
Total operating expenses increased by 10.6% yoy on the back of the 12.6% yoy
growth in staff expenses and 7.3% increase in other operating expenses. The bank
made provision of `140cr towards the gratuity liability in 3QFY2011. The
projected total liability on account of gratuity was estimated at `2,200cr, which has
been revised downwards to `1,900cr on account of a higher discounting rate.
Accordingly, the bank made a provision of `140cr during the quarter taking the
total provisions for gratuity to `1,540cr.
To factor in the remaining charge of ~`360cr on this account, we have increased
our opex estimates for 4QFY2011. However, the pension liability amount is yet to
crystalise, upon which there could be further revisions in our estimates. Payment to
employees increased by 11.4% yoy on account of wage revisions and strong
employee recruitments over the past one year. Other operating expenses recorded
a 7.3% yoy increase. The bank incurred `72cr for setting up of 565 branches and
`256cr for opening 2,951 new ATMs during CY2010. The cost-to-income ratio for
3QFY2011 stood at 45.3%, down from 47.5% during 2QFY2011 and 52.3%
during 3QFY2010.
Comfortable capital adequacy
The bank has continued to maintain comfortable capital adequacy ratio (CAR) of
above 13%. As of 3QFY2011, overall CAR stood at 13.2%, with tier-1 constituting
more than 72.9% of the total CAR. The bank plans to launch more retail bond
issues in 4QFY2011. The bank plans to make a rights issue over the next few
months to sustain its capital adequacy at comfortable levels.
The government has also approved diluting its stake in the bank to 51% from the
existing stipulated dilution level of 55%. This provides significant headroom for
dilution for the existing government holding of 59.4%.
Performance of associates and subsidiaries
Advances and deposits of associate banks recorded yoy growth of 18.4% and
12.7%, respectively. In 3QFY2011, gross and net NPAs stood at 2.5% and
1.1%, respectively, compared to 2.4% and 1.1%, respectively, in 2QFY2011.
Operating profit of associate banks increased by 18.2% yoy to `1,887cr from
`1,597cr. Net profit of associate banks also recorded healthy growth of 15.4%
yoy to `864cr from `748cr. Provision coverage ratio (including AUCA) stood
at 68.0%.
SBI Life clocked PAT of `301cr registering yoy growth of 51%. Of the total
market share of 27.9% held by private insurance companies, SBI Life has a
market share of 18.3%.
SBI Capital Markets posted PAT of `321cr during 3QFY2011, registering a
robust yoy growth of 181%.
SBI Cards and Payment Services issued 3 lakh cards during FY2011, a growth
of 74%. Provisions /write offs declined by 57% yoy.
SBI DFHI recorded PBT of `69cr. The marketing units contributed income of
`8cr to overall trading income.
SBI Pension Fund’s AuM recorded growth of 48% over FY2010 to `3,394cr.
During 3QFY2011, the overall SBI Group recorded a 12.3% yoy growth in net
profit to `3,710cr (`3,305cr).
Investment arguments
Improving savings market share
Up to FY2007, the bank witnessed a significant decline in CASA market share with
the 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.
Initiatives for bolstering the already strong CASA franchise
The bank enjoys a strong liability franchise through a robust CASA deposits base. It
has adopted innovative ways to further bolster the base, such as:
The bank has entered into a joint venture agreement with Bharti Airtel to make
banking services available through mobile banking;
The “Bank on Bike” has been launched in Andhra Pradesh wherein the
unbanked villages are served with help of a bike, laptop and data card; and
Premium Banking Centre launched in September 2010 caters the HNI
requirements in Hyderabad’s Kohinoor Banjara, which provides premium
services such as lockers, 24-hour banking, etc.
Strongest fee income among PSU banks
SBI has a relatively strong share of fee income, owing to its strong corporate and
government business relationships. In 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 3.2% and net NPA ratio of 1.6%, leading to a low
provision coverage ratio of 64.1% (including technical write-offs) and restructured
loans of ~`32,750cr, constituting 43.6% of its net worth. However, as witnessed in
3QFY2011, slippages are expected to remain lower, while recoveries and
upgrades are also expected to pick up strongly, thereby helping the bank in
containing its provisioning burden. Accordingly, we expect NPA provisions/average
assets to come down to 0.5% in FY2012 from 0.8% in FY2011.
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 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. At the CMP, the stock is trading at 2.0x FY2012E
ABV (without adjusting value of subsidiaries). We believe going forward, SBI
has ample levers to deliver healthy operating income growth even in the rising
interest rate environment as well as manage its provisioning requirements. We
maintain a Buy recommendation on the stock, with a Target Price of `3,490.
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