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SBI's 3QFY11 PAT was up 14% YoY at Rs28.3b (10% higher than our estimate). Performance on operating parameters
was significantly better than we had anticipated. Some of the positive surprises are: margin improvement of 18bp QoQ (v/
s our estimate of 10bp decline), lower than expected opex (13% lower than estimated), and stable asset quality.
Key highlights
Margins have improved 18bp QoQ and 79bp YoY to 3.61%, led by a sequential drop in cost of deposits (13bp).
Improvement in CASA ratio (~90bp QoQ) and CD ratio at elevated level of 77% also aided NIM expansion. The
management guided that margins would be maintained at current levels (may see 10bp improvement in 4QFY11).
For FY12, the management guided margin of 3.3% v/s ~3.5% expected in FY11.
Operating expenses increased 11% YoY (down 3% QoQ), 13% lower than our estimate. With increase in benchmark
yields, gratuity liability is revised to Rs19b as against Rs22b earlier.
In absolute terms, GNPA remained flat QoQ at Rs234b. PCR including technical write-offs increased to 64% (v/s
62.8% in 2QFY11). Reported slippages for the quarter were at Rs39b (including Rs7.7b of URIPY balance reduction).
The management said that SBI's special home loan scheme does not classify as teaser rate loan; hence, it has not
made 2% standard provision on this portfolio. The bank has currently provided at 0.4% and if RBI does not agree, it
will have to make an additional provision of Rs5b. Also, its second pension liability provisions are without considering
the 9th bipartite agreement and provided as per 8th bipartite agreement. The management is still waiting for actuarial
valuations for the same and plans to amortize the liability over five years.
Valuation and view: The stock trades at 1.5x FY12E and 1.3x FY13E consolidated BV. We expect RoA to improve
from 0.9% in FY10 to ~1% in FY11 and ~1.1% in FY12-13. RoE is likely to improve from 15% in FY10 to 18-19% by
FY13 (without assuming capital raising). Maintain Buy.
NII growth higher than estimated, led by superior margin performance
NIM for the quarter improved by 18bp QoQ to 3.6%, leading to 43% YoY (+12% QoQ)
growth in NII to Rs90.5b (8% higher than estimated). Healthy growth in CASA deposits
and elevated CD ratio aided margin expansion. Interest income included Rs2.3b of interest
under IT refund v/s Rs3.7b a year ago and Rs1.2b a quarter ago, adjusted for which NII
grew 10% QoQ and 48% YoY. Yield on loans for 9MFY11 were at 9.58% v/s 9.5% in
1HFY11 and 9.8% in 9MFY10. In our view, yield on loans improved 4bp QoQ for 3QFY11
(9.74%) v/s 2QFY11 (9.7%).
Full impact of (1) 25bp increase in BPLR and 10bp hike in base rate in 3QF11, and (2)
40bp hike in base rate and 25bp in PLR in 4QFY11 will aid margin performance. Cost of
deposits declined marginally to 5.20% in 9MFY11 v/s 5.25% for 1HFY11. Cost of deposits
declined 13bp QoQ (2QFY11 at 5.23% and 3QFY11 at 5.1%) as ~70% of the incremental
deposits were CASA deposits and some of the old high cost TD re-priced at a lower rate.
Cost of deposits have bottomed out and will see moderate increases now. The management
has guided that NIM will improve by 10bp in 4QFY11, led by rise in base rate and PLR at
the beginning of the quarter
Improving asset quality trend
In absolute terms, GNPA remained flat sequentially at Rs234b. PCR including technical
write-offs increased to 64% v/s 62.7% a quarter ago. The bank has to comply with 70%
PCR requirement by the end of September 2011. Incremental provisioning required for
70% PCR is ~Rs20b, to be amortized over three quarters. Reported slippages for the
quarter were at Rs31.5b (annualized slippage ratio of 2.5%, down from 2.6% (core) in
1HFY11). During the quarter, the bank reduced Rs7.7b of URIPY balance from GNPA,
resulting in higher adjusted slippages of Rs39b. Balance under URIPY was fully provided;
thus, there should be a proportionate increase in write-offs.
In our view, write-offs should be Rs22.5b (v/s reported level of Rs14.5b). The bank made
provisions of Rs20.5b during the quarter, including MTM provision of Rs2.1b. NPA provisions
stood at Rs16.3b, which also include additional provisions made to improve coverage
ratio. Total restructured loans stood at Rs327.5b, which includes Rs184b restructured
under RBI scheme. Of the total restructured portfolio, assets worth Rs44.2b have slipped
as NPAs. Under the RBI scheme, slippages are Rs29b (15.7% of restructured portfolio).
During 3QFY11, Rs20b of loans were restructured, which included Rs16b of loans to
Kingfisher.
Loan growth in line with industry average, traction in CASA impressive
Loans grew 21% YoY while deposits were up 14% YoY. On domestic operations, CD
ratio was 77% v/s 75% in 2QFY11. Large corporate loans grew 28% YoY and 14% QoQ,
led by infrastructure and petroleum. Reported CASA ratio improved 92bp QoQ and 577bp
YoY to 48.7%, the highest after HDFC Bank. Growth in savings deposits was impressive
at ~30%, leading to ~28% growth in CASA deposits.
Fee income growth at 21%, operating leverage getting visible
Non-interest income (ex-treasury) grew 6% YoY to Rs31b. While fee income grew 13%
YoY, forex income and other miscellaneous income dropped 17% YoY. In 3QFY10, change
in accounting for ATM intercharge fee had led to excess income recognition of Rs2.2b
(for 9MFY10 in 3QFY10 itself). Adjusted for this, growth in fee income was higher at
21%. Trading profits were at Rs2.2b v/s Rs2b in 2QFY11 and Rs4.4b in 3QFY10.
Operating expenses were up 11% YoY but declined 3% QoQ (13% lower than our estimate).
Cost to core income (ex trading profits) ratio was down at 46% v/s 48% in 2QFY11 and
55% in 3QFY10. With increase in benchmark yields, guidance towards gratuity liability
has been revised downwards by Rs3b to Rs19b. During the quarter, the bank provided
Rs1.4b towards gratuity, taking the cumulative provision in 9MFY11 to Rs15.4b. Pension
liability provisions are without considering the 9th bipartite agreement and are being provided
as per 8th bipartite agreement. We wait for details on the shortfall on this account.
Consolidated 3QFY11 PAT grew 40% YoY
For 3QFY11, consolidated NII grew 40% YoY (7% QoQ) to Rs123b while other income
improved 5% YoY to Rs76b. Opex increased 15% YoY to Rs110.2b. SBI's subsidiary
banks reported operating profit growth of 18% YoY, led by strong NII growth of 35%.
However, increased provisions led to lower PAT growth of 15% YoY. Provisions for
3QFY11 were Rs6b v/s Rs5b in 2QFY11. Including technical write-offs, consolidated
PCR stands at 68%. SBI Life reported PAT of Rs3b for 9MFY11, up 51% YoY.
Valuation and view
Adjusted for life insurance valuation, SBI trades at 1.5x FY12E consolidated BV of Rs1,657
and 9.1x FY12E consolidated EPS of Rs273. Standalone RoE will be 18-19% in FY12/13.
The stock has corrected ~25% from its peak on concerns relating to margins and asset
quality. We believe valuations are attractive.
We expect RoA to improve from 0.9% in FY10 to ~1% in FY11 and ~1.1% in FY12-13.
RoE is likely to improve from 15% in FY10 to 18-19% by FY13 (without assuming capital
raising). The Rs200b rights issue should happen shortly, once government approval comes.
SBI remains our top pick in the sector with a target price of Rs3,600 (1.8x FY13E
consolidated BV + Rs127 for insurance). Key risks are higher pension liabilities, RBI's
further monetary policy stance and any risk to industrial growth at macro level, which can
impact potential loan growth in FY12.
Company description
State Bank of India (SBI) is India's largest commercial bank,
with a balance sheet size of over ~Rs11.4t and government
of India ownership of 59.4%. The bank, along with associate
banks, has over 16,000+ branches in India and controls over
~24% of the banking business. SBI has improved itself
through technological upgrades, honing manpower skills and
business process re-engineering to be competitive and
efficient for the next growth opportunity.
Key investment arguments
Proxy to Indian economy; will benefit from India's
economic growth.
Strong CASA ratio and improvement in loan growth
will help to improve/maintain margins.
Demonstrating the strong performance on fees and
expects to maintain the strong traction.
Strong operating leverage, Cost to Core Income ratio
to decline in FY12-13.
Higher retirements and natural attrition will pull down
operating costs significantly over the next 3-4 years.
Key investment risks
Management's focus on increasing market share may
come at the cost of profitability.
NPAs have been increasing over few quarters and
coverage ratio continues to be below industry average.
Company description
State Bank of India (SBI) is India's largest commercial bank,
with a balance sheet size of over ~Rs11.4t and government
of India ownership of 59.4%. The bank, along with associate
banks, has over 16,000+ branches in India and controls over
~24% of the banking business. SBI has improved itself
through technological upgrades, honing manpower skills and
business process re-engineering to be competitive and
efficient for the next growth opportunity.
Key investment arguments
Proxy to Indian economy; will benefit from India's
economic growth.
Strong CASA ratio and improvement in loan growth
will help to improve/maintain margins.
Demonstrating the strong performance on fees and
expects to maintain the strong traction.
Strong operating leverage, Cost to Core Income ratio
to decline in FY12-13.
Higher retirements and natural attrition will pull down
operating costs significantly over the next 3-4 years.
Key investment risks
Management's focus on increasing market share may
come at the cost of profitability.
NPAs have been increasing over few quarters and
coverage ratio continues to be below industry average.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
SBI's 3QFY11 PAT was up 14% YoY at Rs28.3b (10% higher than our estimate). Performance on operating parameters
was significantly better than we had anticipated. Some of the positive surprises are: margin improvement of 18bp QoQ (v/
s our estimate of 10bp decline), lower than expected opex (13% lower than estimated), and stable asset quality.
Key highlights
Margins have improved 18bp QoQ and 79bp YoY to 3.61%, led by a sequential drop in cost of deposits (13bp).
Improvement in CASA ratio (~90bp QoQ) and CD ratio at elevated level of 77% also aided NIM expansion. The
management guided that margins would be maintained at current levels (may see 10bp improvement in 4QFY11).
For FY12, the management guided margin of 3.3% v/s ~3.5% expected in FY11.
Operating expenses increased 11% YoY (down 3% QoQ), 13% lower than our estimate. With increase in benchmark
yields, gratuity liability is revised to Rs19b as against Rs22b earlier.
In absolute terms, GNPA remained flat QoQ at Rs234b. PCR including technical write-offs increased to 64% (v/s
62.8% in 2QFY11). Reported slippages for the quarter were at Rs39b (including Rs7.7b of URIPY balance reduction).
The management said that SBI's special home loan scheme does not classify as teaser rate loan; hence, it has not
made 2% standard provision on this portfolio. The bank has currently provided at 0.4% and if RBI does not agree, it
will have to make an additional provision of Rs5b. Also, its second pension liability provisions are without considering
the 9th bipartite agreement and provided as per 8th bipartite agreement. The management is still waiting for actuarial
valuations for the same and plans to amortize the liability over five years.
Valuation and view: The stock trades at 1.5x FY12E and 1.3x FY13E consolidated BV. We expect RoA to improve
from 0.9% in FY10 to ~1% in FY11 and ~1.1% in FY12-13. RoE is likely to improve from 15% in FY10 to 18-19% by
FY13 (without assuming capital raising). Maintain Buy.
NII growth higher than estimated, led by superior margin performance
NIM for the quarter improved by 18bp QoQ to 3.6%, leading to 43% YoY (+12% QoQ)
growth in NII to Rs90.5b (8% higher than estimated). Healthy growth in CASA deposits
and elevated CD ratio aided margin expansion. Interest income included Rs2.3b of interest
under IT refund v/s Rs3.7b a year ago and Rs1.2b a quarter ago, adjusted for which NII
grew 10% QoQ and 48% YoY. Yield on loans for 9MFY11 were at 9.58% v/s 9.5% in
1HFY11 and 9.8% in 9MFY10. In our view, yield on loans improved 4bp QoQ for 3QFY11
(9.74%) v/s 2QFY11 (9.7%).
Full impact of (1) 25bp increase in BPLR and 10bp hike in base rate in 3QF11, and (2)
40bp hike in base rate and 25bp in PLR in 4QFY11 will aid margin performance. Cost of
deposits declined marginally to 5.20% in 9MFY11 v/s 5.25% for 1HFY11. Cost of deposits
declined 13bp QoQ (2QFY11 at 5.23% and 3QFY11 at 5.1%) as ~70% of the incremental
deposits were CASA deposits and some of the old high cost TD re-priced at a lower rate.
Cost of deposits have bottomed out and will see moderate increases now. The management
has guided that NIM will improve by 10bp in 4QFY11, led by rise in base rate and PLR at
the beginning of the quarter
Improving asset quality trend
In absolute terms, GNPA remained flat sequentially at Rs234b. PCR including technical
write-offs increased to 64% v/s 62.7% a quarter ago. The bank has to comply with 70%
PCR requirement by the end of September 2011. Incremental provisioning required for
70% PCR is ~Rs20b, to be amortized over three quarters. Reported slippages for the
quarter were at Rs31.5b (annualized slippage ratio of 2.5%, down from 2.6% (core) in
1HFY11). During the quarter, the bank reduced Rs7.7b of URIPY balance from GNPA,
resulting in higher adjusted slippages of Rs39b. Balance under URIPY was fully provided;
thus, there should be a proportionate increase in write-offs.
In our view, write-offs should be Rs22.5b (v/s reported level of Rs14.5b). The bank made
provisions of Rs20.5b during the quarter, including MTM provision of Rs2.1b. NPA provisions
stood at Rs16.3b, which also include additional provisions made to improve coverage
ratio. Total restructured loans stood at Rs327.5b, which includes Rs184b restructured
under RBI scheme. Of the total restructured portfolio, assets worth Rs44.2b have slipped
as NPAs. Under the RBI scheme, slippages are Rs29b (15.7% of restructured portfolio).
During 3QFY11, Rs20b of loans were restructured, which included Rs16b of loans to
Kingfisher.
Loan growth in line with industry average, traction in CASA impressive
Loans grew 21% YoY while deposits were up 14% YoY. On domestic operations, CD
ratio was 77% v/s 75% in 2QFY11. Large corporate loans grew 28% YoY and 14% QoQ,
led by infrastructure and petroleum. Reported CASA ratio improved 92bp QoQ and 577bp
YoY to 48.7%, the highest after HDFC Bank. Growth in savings deposits was impressive
at ~30%, leading to ~28% growth in CASA deposits.
Fee income growth at 21%, operating leverage getting visible
Non-interest income (ex-treasury) grew 6% YoY to Rs31b. While fee income grew 13%
YoY, forex income and other miscellaneous income dropped 17% YoY. In 3QFY10, change
in accounting for ATM intercharge fee had led to excess income recognition of Rs2.2b
(for 9MFY10 in 3QFY10 itself). Adjusted for this, growth in fee income was higher at
21%. Trading profits were at Rs2.2b v/s Rs2b in 2QFY11 and Rs4.4b in 3QFY10.
Operating expenses were up 11% YoY but declined 3% QoQ (13% lower than our estimate).
Cost to core income (ex trading profits) ratio was down at 46% v/s 48% in 2QFY11 and
55% in 3QFY10. With increase in benchmark yields, guidance towards gratuity liability
has been revised downwards by Rs3b to Rs19b. During the quarter, the bank provided
Rs1.4b towards gratuity, taking the cumulative provision in 9MFY11 to Rs15.4b. Pension
liability provisions are without considering the 9th bipartite agreement and are being provided
as per 8th bipartite agreement. We wait for details on the shortfall on this account.
Consolidated 3QFY11 PAT grew 40% YoY
For 3QFY11, consolidated NII grew 40% YoY (7% QoQ) to Rs123b while other income
improved 5% YoY to Rs76b. Opex increased 15% YoY to Rs110.2b. SBI's subsidiary
banks reported operating profit growth of 18% YoY, led by strong NII growth of 35%.
However, increased provisions led to lower PAT growth of 15% YoY. Provisions for
3QFY11 were Rs6b v/s Rs5b in 2QFY11. Including technical write-offs, consolidated
PCR stands at 68%. SBI Life reported PAT of Rs3b for 9MFY11, up 51% YoY.
Valuation and view
Adjusted for life insurance valuation, SBI trades at 1.5x FY12E consolidated BV of Rs1,657
and 9.1x FY12E consolidated EPS of Rs273. Standalone RoE will be 18-19% in FY12/13.
The stock has corrected ~25% from its peak on concerns relating to margins and asset
quality. We believe valuations are attractive.
We expect RoA to improve from 0.9% in FY10 to ~1% in FY11 and ~1.1% in FY12-13.
RoE is likely to improve from 15% in FY10 to 18-19% by FY13 (without assuming capital
raising). The Rs200b rights issue should happen shortly, once government approval comes.
SBI remains our top pick in the sector with a target price of Rs3,600 (1.8x FY13E
consolidated BV + Rs127 for insurance). Key risks are higher pension liabilities, RBI's
further monetary policy stance and any risk to industrial growth at macro level, which can
impact potential loan growth in FY12.
Company description
State Bank of India (SBI) is India's largest commercial bank,
with a balance sheet size of over ~Rs11.4t and government
of India ownership of 59.4%. The bank, along with associate
banks, has over 16,000+ branches in India and controls over
~24% of the banking business. SBI has improved itself
through technological upgrades, honing manpower skills and
business process re-engineering to be competitive and
efficient for the next growth opportunity.
Key investment arguments
Proxy to Indian economy; will benefit from India's
economic growth.
Strong CASA ratio and improvement in loan growth
will help to improve/maintain margins.
Demonstrating the strong performance on fees and
expects to maintain the strong traction.
Strong operating leverage, Cost to Core Income ratio
to decline in FY12-13.
Higher retirements and natural attrition will pull down
operating costs significantly over the next 3-4 years.
Key investment risks
Management's focus on increasing market share may
come at the cost of profitability.
NPAs have been increasing over few quarters and
coverage ratio continues to be below industry average.
Company description
State Bank of India (SBI) is India's largest commercial bank,
with a balance sheet size of over ~Rs11.4t and government
of India ownership of 59.4%. The bank, along with associate
banks, has over 16,000+ branches in India and controls over
~24% of the banking business. SBI has improved itself
through technological upgrades, honing manpower skills and
business process re-engineering to be competitive and
efficient for the next growth opportunity.
Key investment arguments
Proxy to Indian economy; will benefit from India's
economic growth.
Strong CASA ratio and improvement in loan growth
will help to improve/maintain margins.
Demonstrating the strong performance on fees and
expects to maintain the strong traction.
Strong operating leverage, Cost to Core Income ratio
to decline in FY12-13.
Higher retirements and natural attrition will pull down
operating costs significantly over the next 3-4 years.
Key investment risks
Management's focus on increasing market share may
come at the cost of profitability.
NPAs have been increasing over few quarters and
coverage ratio continues to be below industry average.
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