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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.
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.
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.
Recent developments
The bank has appointed Mr Deepak Ahuja as Head of
Consumer Banking.
SBI and Bharti Airtel have entered into a JV to offer
mobile banking services.
Valuation and view
The stock has corrected ~25% from its recent high on
concerns relating to interest rates and asset quality. We
believe valuations are attractive 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.
Sector view
Loan growth remains strong. However, rising inflation
and increasing interest rates are the near-term
headwinds for the sector.
Our economist expects current tightness in liquidity to
start easing in 4QFY11, allaying the pressure of
significant NIM compression.
We believe that margins would start compressing, but
gradually. With strong loan growth and high CD ratio,
there is strong pricing power with banks.
Banks with high CASA deposits and lower proportion
of bulk deposits will be preferred bets.
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.
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.
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.
Recent developments
The bank has appointed Mr Deepak Ahuja as Head of
Consumer Banking.
SBI and Bharti Airtel have entered into a JV to offer
mobile banking services.
Valuation and view
The stock has corrected ~25% from its recent high on
concerns relating to interest rates and asset quality. We
believe valuations are attractive 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.
Sector view
Loan growth remains strong. However, rising inflation
and increasing interest rates are the near-term
headwinds for the sector.
Our economist expects current tightness in liquidity to
start easing in 4QFY11, allaying the pressure of
significant NIM compression.
We believe that margins would start compressing, but
gradually. With strong loan growth and high CD ratio,
there is strong pricing power with banks.
Banks with high CASA deposits and lower proportion
of bulk deposits will be preferred bets.
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