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State Bank of India -Top line traction & cost pressures on a balance, Hold
Fall in stock prices in some risks but downsides exist
We maintain Hold on SBI after reducing TP to INR2750 from INR2880 following
earnings revision and a marginally lower multiple because of challenges from
rising rates. The sharp fall in the stock from the recent peak has factored in some
risks and outturn on NIMs been better than estimates. However, credit quality and
credit cost issues are still prominent, and operating cost-related downsides not yet
out of the way.
Q3FY11 result (standalone) – Strong NIM expansion boosts profitability
SBI reported net profit of INR28bn, up 14% YoY and 7% ahead of our estimates
and 4% ahead of consensus. NIM expanded further 18bps QoQ on account of
higher CASA (low-cost deposits) leading to lower cost of funds. Consequent to
this, NII witnessed a strong 43% YoY growth and 9% ahead of our estimates.
Loan growth of 21% YoY was driven by momentum in both retail and corporate
sector. Asset quality was stable with Gross NPL rising just 1% QoQ. Restructuring
shot up during the quarter due to one large airline account.
NIM and fee growth buoyant but credit and operating costs face pressure
While SBI has done a commendable job in reaching the current record NIM, some
of it most likely has to be given off as the scenario has turned from excess liquidity
to shortage of deposits. Since the bank held on to comparatively low lending rates
for a long time, asset side re-pricing may not be adequate. Unlike most other
banks, SBI would have to bear higher credit costs on account of provision
coverage shortfall. Pension liabilities should rise once the recent wage increases
are factored in. On the positive side fee income growth remains buoyant.
P/BV-RoE valuation; pension a downside, provisioning could be an upside
We value SBI on the Gordon growth model using consolidated valuations and add
appraisal value of the life business. The key upside possibilities are acceleration of
loan growth and a decline in credit costs. Downside risks are operating costs
increasing due to fresh recruitments/pension costs and a reversal of the upward
trend in NIMs. The earnings reduction for consolidated FY11E is on account of
higher provisions and credit costs – changes for subsequent years are modest.
Investment thesis
Outlook
SBI's net interest margin trajectory has been improving on account of re-pricing of high-cost
deposits and the low-cost deposit ratio remaining one of the best in the sector. The initiatives
of the last 2-3 years on fee incomes, mainly syndication revenues and new products, are
bearing fruit now and we expect the momentum to continue. However, operating cost
increases (including because of mergers with subsidiary banks) could be significant. Credit
costs could remain elevated as slippages continue to be high and the bank has to increase its
provision coverage ratio to conform to regulatory norms. For the above reasons, we rate SBI
a Hold.
Valuation
We value the core bank based on consolidated estimates using the single-stage Gordon
Growth model. Assumptions include: blended RoE 17.5%, g = 5% (in line with long-term
growth of developed economies), cost of equity of 13.3% (using DB estimates). To that we
add the estimated value of SBI's stake in the life insurance business (based on appraisal
value, i.e. new business plus embedded value). Key assumptions for the life business are:
14% new business margin and 15.5x new business multiple. We exclude the investment in
life insurance from the consolidated book used in step 1. The total sum of parts (rounded off)
comes to INR2,750.
Risks
The key upside risks are acceleration of loan growth and a decline in credit costs (SBI's loan
growth is just around sector average and credit costs are currently high). Downside risks are
operating costs increasing due to fresh recruitments/pension costs (SBI has been recruiting
more aggressively than others) and a reversal of the upward trend in NIMs (rising since
Q2FY10).
Q3FY11 results – strong NIM leads to higher NII
SBI reported net profit of INR 28bn, up 14% YoY and 7% above our estimates driven by
strong margin expansion and loan growth along with lower than expected provisioning. Net
interest income was up 43.3% and ~9% above our estimates on account of 18bps QoQ
expansion in margins.
Loan growth at 21% YoY was driven by strong momentum in both retail and corporate
sectors.
Earnings, valuation, and target price
Earnings revision
We are lowering FY11E and FY12E net profit estimates by 11% and 3.3% respectively to
account for lower than estimate NII and higher operating expenses.
Target price
We value the core bank based on consolidated estimates using the single-stage Gordon
Growth model. To that we add the estimated value of SBI's stake in the life insurance
business. We are lowering the target price to INR2,750 from INR2,880 due to ascribing lower
earnings estimates and due to housekeeping changes to cost of equity
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
State Bank of India -Top line traction & cost pressures on a balance, Hold
Fall in stock prices in some risks but downsides exist
We maintain Hold on SBI after reducing TP to INR2750 from INR2880 following
earnings revision and a marginally lower multiple because of challenges from
rising rates. The sharp fall in the stock from the recent peak has factored in some
risks and outturn on NIMs been better than estimates. However, credit quality and
credit cost issues are still prominent, and operating cost-related downsides not yet
out of the way.
Q3FY11 result (standalone) – Strong NIM expansion boosts profitability
SBI reported net profit of INR28bn, up 14% YoY and 7% ahead of our estimates
and 4% ahead of consensus. NIM expanded further 18bps QoQ on account of
higher CASA (low-cost deposits) leading to lower cost of funds. Consequent to
this, NII witnessed a strong 43% YoY growth and 9% ahead of our estimates.
Loan growth of 21% YoY was driven by momentum in both retail and corporate
sector. Asset quality was stable with Gross NPL rising just 1% QoQ. Restructuring
shot up during the quarter due to one large airline account.
NIM and fee growth buoyant but credit and operating costs face pressure
While SBI has done a commendable job in reaching the current record NIM, some
of it most likely has to be given off as the scenario has turned from excess liquidity
to shortage of deposits. Since the bank held on to comparatively low lending rates
for a long time, asset side re-pricing may not be adequate. Unlike most other
banks, SBI would have to bear higher credit costs on account of provision
coverage shortfall. Pension liabilities should rise once the recent wage increases
are factored in. On the positive side fee income growth remains buoyant.
P/BV-RoE valuation; pension a downside, provisioning could be an upside
We value SBI on the Gordon growth model using consolidated valuations and add
appraisal value of the life business. The key upside possibilities are acceleration of
loan growth and a decline in credit costs. Downside risks are operating costs
increasing due to fresh recruitments/pension costs and a reversal of the upward
trend in NIMs. The earnings reduction for consolidated FY11E is on account of
higher provisions and credit costs – changes for subsequent years are modest.
Investment thesis
Outlook
SBI's net interest margin trajectory has been improving on account of re-pricing of high-cost
deposits and the low-cost deposit ratio remaining one of the best in the sector. The initiatives
of the last 2-3 years on fee incomes, mainly syndication revenues and new products, are
bearing fruit now and we expect the momentum to continue. However, operating cost
increases (including because of mergers with subsidiary banks) could be significant. Credit
costs could remain elevated as slippages continue to be high and the bank has to increase its
provision coverage ratio to conform to regulatory norms. For the above reasons, we rate SBI
a Hold.
Valuation
We value the core bank based on consolidated estimates using the single-stage Gordon
Growth model. Assumptions include: blended RoE 17.5%, g = 5% (in line with long-term
growth of developed economies), cost of equity of 13.3% (using DB estimates). To that we
add the estimated value of SBI's stake in the life insurance business (based on appraisal
value, i.e. new business plus embedded value). Key assumptions for the life business are:
14% new business margin and 15.5x new business multiple. We exclude the investment in
life insurance from the consolidated book used in step 1. The total sum of parts (rounded off)
comes to INR2,750.
Risks
The key upside risks are acceleration of loan growth and a decline in credit costs (SBI's loan
growth is just around sector average and credit costs are currently high). Downside risks are
operating costs increasing due to fresh recruitments/pension costs (SBI has been recruiting
more aggressively than others) and a reversal of the upward trend in NIMs (rising since
Q2FY10).
Q3FY11 results – strong NIM leads to higher NII
SBI reported net profit of INR 28bn, up 14% YoY and 7% above our estimates driven by
strong margin expansion and loan growth along with lower than expected provisioning. Net
interest income was up 43.3% and ~9% above our estimates on account of 18bps QoQ
expansion in margins.
Loan growth at 21% YoY was driven by strong momentum in both retail and corporate
sectors.
Earnings, valuation, and target price
Earnings revision
We are lowering FY11E and FY12E net profit estimates by 11% and 3.3% respectively to
account for lower than estimate NII and higher operating expenses.
Target price
We value the core bank based on consolidated estimates using the single-stage Gordon
Growth model. To that we add the estimated value of SBI's stake in the life insurance
business. We are lowering the target price to INR2,750 from INR2,880 due to ascribing lower
earnings estimates and due to housekeeping changes to cost of equity
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