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State Bank of India
Strong all round show; Reiterate Buy
„3Q: Earnings beat est.; topline, margins, CASA surprise
SBI’s 3QFY11 earnings at Rs28.3bn were 8% ahead of estimates and grew 14%
yoy. The two key fears that the street had on SBI was on topline and asset quality,
both of which were better than expected. Topline grew +43% yoy (13% ahead),
driven by 22% yoy loan growth and margin expansion of 79bps yoy (18bps qoq)
to +3.6% on lower funding costs. This was a key surprise. CASA jumped to 48.2%
(up 38bps qoq). Core fees grew +21% yoy. Opex growth was low (6% below est.),
as bank had a write-back of excess wage provision of Rs390mn in 3Q.
Asset quality- a key worry, also stabilizing
NPL accretion has begun to stabilize. Fresh slippages est. at Rs39bn (adding the
unrealized interest on NPLs) vs.+Rs44bn (adj. for St. Bk of Indore) in 2Q.
Moreover, net accretion is down 25% qoq to Rs17bn. Headline gross NPL% is
down to 18bps qoq (at 3.2%) and net is down 9bps qoq (at 1.6%). Provision cover
at +64%. Restructured asset totaled Rs328bn (Rs184bn under RBI scheme). We
expect the asset quality to show a marked improvement in coming quarters.
PO, earnings cut due to macro headwinds; Reiterate BUY
While earnings were good, we are cutting our PO and forecast earnings to
capture the macro headwinds and also building in the 2
nd
pension hit (though it’s
not crystallized). PO cut by +10-11% to Rs3400 and earnings by 2/8/8% in
FY11/12/13. But SBI still remains amongst our preferred picks, with earnings
growth forecast at +35/30% in FY12/13; RoE rising to +19% (standalone) and
trading at <1.7x FY12 adj. BV. Further, it is most leveraged to improving macros
and rate cycle. Non-banks biz. add another Rs269/share (after 10% Holdco disc.).
3QFY11 results overview
Earnings beat est. driven by topline and stabilizing asset quality
SBI’s 3QFY11 earnings at Rs28.3bn were 8% ahead of estimates and grew 14%
yoy driven by stronger than expected topline. The key fear that the street had on
SBI was topline and asset quality, both of which have shown better than expected
performance.
Topline surprises on margins, CASA and, volumes
Topline grew +43% yoy (13% ahead) and was driven by 22% yoy loan growth
(large corporate growth at 28% yoy). But more importantly, the strong topline
growth driver was margins, which expanded by 79bps yoy and 18bps qoq to
+3.6% as SBI is one of the few banks to still see a contraction in cost of deposits
(72bps yoy and 5bps qoq). Margin support also came from a sustained rise in
CASA deposits (ratio up 523bps yoy and 38bps qoq) to 48.2%.
Loan growth driven by large corporate group (up 28% yoy) followed by retail
loan growth of 24% yoy (home loans 22% yoy, auto loans up 52% yoy). SME loan
growth was 21% yoy agriculture loan growth at 17% yoy, international loan
growth at 18% yoy and, mid-corporate loan growth at 18% yoy.
Asset quality appears to be stabilizing; net accretion down 25% qoq
Asset quality also appears to be stabilizing, with slippages (new) down to
Rs31.5bn vs. +Rs44bn (adjusted for St. Bk of Indore NPLs) in 2Q and Rs41bn in
1Q. But, for Rs7.8bn, which the bank was not netting from gross NPLs earlier
owing to that amount being unrealized interest on NPLs and hence slippages are
higher to that extent to Rs39bn, but simultaneously, recoveries are also higher by
the same amount as these NPLs were fully provided for, so no P&L impact.
However, net accretion (slippages less recoveries and upgradations) are down
25% qoq to Rs17bn.
Almost 50% of the fresh slippages have come from corporate banking group.
Resultantly, headline NPLs are flat qoq. Gross NPL% is down to 18bps qoq and
net is down 9bps qoq. Provision cover at +64% now vs. 62.8% in 2Q.
Restructured asset totaled Rs328bn of which under RBI scheme were Rs184bn
and the balance under bank’s scheme. Of the total Rs21bn of fresh restructuring
in 3Q, Rs15bn odd came from Kingfisher debt restructuring which has happened
at sector level. Total slippages from restructured a/c’s is at 13.5%, while
individually, under RBI scheme is 15.7% and under bank’s scheme is 10.7%.
Core fee growth was only 13% yoy, but for change in accounting, net ATM
interchange fee of Rs2.2bn for entire 9MFY10 was added to fee income in
3QFY10. Adjusting on pro rata basis, yoy growth in fee income would be +21%
for 3QFY11. The major contributors to fee income growth were commission from
government business, commission from cross selling, loan processing charges,
underwriting fees and commission from LC/BG business
Opex was up only 11% yoy and was 6% below estimates as the bank had a
write-back of excess wage provision of Rs390mn in 3Q. Staff cost also includes
Rs1.4bn towards gratuity in 3Q and ~Rs15bn for 9MFY11.
Performance of SBI associate banks and key subsidiaries
We highlight below key subsidiaries and associate banks performance during
3QFY11:
„ Associate Banks: Net interest income has grown +46% yoy in Dec’10 for
associate banks. NIMs improved +52bps YTD (since Mar’10) and are up
7bps qoq. Net Profit grew 16% in 9MFY11 on account of higher provisions
for employee benefits and NPL related provisions. Loans have grown +18%
yoy and deposits at ~13% yoy as on Dec’10, with CASA at ~32.5%. Total
CAR for associate bank is 13.2% and Tier 1 is 8.7%. Gross NPLs at ~2.4%
and net NPLs at 1.1%.
„ SBI Life has recorded a profit of ~Rs0.8bn in 3QFY11 (Rs3bn in 9MFY11
and Rs2.2bn in 1H). Renewal premium growth for SBI Life is up 87% yoy.
„ SBI Caps has posted a PAT of Rs0.6bn in 3QFY11 (Rs3.2bn in 9M, a yoy
growth of +180%).
Cut earnings by ~2/8%; growth at +35/30% in FY12/13
We have cut our earnings by ~2% for FY11 and more than 8% each for FY12/13.
Lower earnings cut in FY11 are owing to very strong and sustained topline
growth. Higher FY12/13 earnings cut to factor in macro headwinds and also
building in the 2
nd
pension hit (though it’s not crystallized). However, earnings are
likely to grow at +35/30% in FY12/13 owing to unwinding of credit costs.
Opex growth est. at 10% in FY12/13 factoring possible pension liab.
We are still building in opex growth of 10% yoy sustaining, as SBI, in our view
could have additional liability of Rs60-65bn (as pension liability has been
estimated without considering the ninth bipartite settlement, as the final approval
from the govt. for revision in pension on the basis of revised salaries is still
pending).
However, SBI has taken gratuity provision of ~Rs15bn in 9MFY11 and expected
at ~Rs19-20bn by FY11 that is partly offset by Rs10bn of excess wage revision
write-backs, which are one-off’s (owing to wage revisions) and unlikely to be there
next year and hence, will likely set-off additional pension provisions required.
Operating profit growth at +55/20/20% in FY11/12/13
Operating earnings (pre-provision profits excluding trading profits) growth to be
much stronger at +55% in FY11 and sustain at +20% in FY12/13. This is driven
by +15-16% topline growth (margins flattish yoy in FY12) and opex growth 10-
11% after factoring in possible pension hits. Further, the C-I ratio should trend
down – owing to better revenues.
NPL accretion at Rs+165bn est. in FY11
As seen in 3Q earnings, SBI’s slippages (fresh) are down 11% qoq and net
accretion is down 25% qoq. But we conservatively estimate accretion levels in
FY11 at +Rs165bn (2.6% -1-yr lag). Hence, we still forecast a +30% rise in
headline gross NPL’s in FY11 after factoring in recoveries (absolute levels).
Moreover, net accretion (additions –recoveries + upgradations) still estimated at
Rs85bn (Rs60bn in 9MFY11) vs. Rs58bn in FY10. Accordingly, we estimate
gross and net NPLs at 3.2% and 1.5%, resp
We are, in our est., modeling in credit costs at ~110bps resulting in lower levels of
net NPLs (%) and reported provision cover rising to 53% in FY11 (from 44% in
FY10), excluding technical write-offs (incl. this cover at +66% by FY11).
SOTP – Cut non-bank subs by 5% on life ins.
We have cut our non-bank value by 5% to factor in a contraction in SBI Life insurance
new- business premia contraction by 8% yoy in FY11 vs. 2% growth earlier. Our value
on life insurance biz. is based on combing the “derived” embedded value and
assigning a multiple (9x for FY12) for “new” biz. We remain positive on SBI Life’s
prospects as we believe players like SBI are in a very strong position on economies of
scale, already reporting profits, and adopting a bancassurance model, which will give
itself an edge vis-à-vis other players in this uncertain scenario.
Valuing ‘total banking’ biz.’
If we were to even consolidate the associate banks, the combined adjusted BV of
the entire banking biz. is estimated at Rs1161 for FY11 and Rs1420 for FY12 with
ROE forecast at ~21% by FY12 for the banking business. The banking biz. (premoney) trading at +2.1-2.2x FY11 (1.6x FY12) book can sustain at these levels in
FY12, implying a price of Rs3,139; adding Rs269 (10% holding discount) for nonbank subs we get our PO of Rs3400.
Price objective basis & risk
SBI (SBINF / SBKFF)
Our PO on SBI is Rs3400, as with earnings growth is forecast at +35/30% in
FY12/13, RoE rising to +19% and trading at <1.6x FY12 adj. BV. Further, it is
most leveraged to improving macros and rate cycle. Non-banks biz. add another
Rs269/share.
Our PO is benchmarked to Gordon modle theory where we assume RoE of 19pct
and CoE OF 14% and assign a 60% premium to theoritical multiples owing to its
large liability franchise and dominant position in the market (+23pct market share
at group level). On a PE basis, the stock is trading at 7.7x FY12E if we adjust the
share price for the subsidiary value. Risks are a sharp rise in NPLs and a hike in
interest rates.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
State Bank of India
Strong all round show; Reiterate Buy
„3Q: Earnings beat est.; topline, margins, CASA surprise
SBI’s 3QFY11 earnings at Rs28.3bn were 8% ahead of estimates and grew 14%
yoy. The two key fears that the street had on SBI was on topline and asset quality,
both of which were better than expected. Topline grew +43% yoy (13% ahead),
driven by 22% yoy loan growth and margin expansion of 79bps yoy (18bps qoq)
to +3.6% on lower funding costs. This was a key surprise. CASA jumped to 48.2%
(up 38bps qoq). Core fees grew +21% yoy. Opex growth was low (6% below est.),
as bank had a write-back of excess wage provision of Rs390mn in 3Q.
Asset quality- a key worry, also stabilizing
NPL accretion has begun to stabilize. Fresh slippages est. at Rs39bn (adding the
unrealized interest on NPLs) vs.+Rs44bn (adj. for St. Bk of Indore) in 2Q.
Moreover, net accretion is down 25% qoq to Rs17bn. Headline gross NPL% is
down to 18bps qoq (at 3.2%) and net is down 9bps qoq (at 1.6%). Provision cover
at +64%. Restructured asset totaled Rs328bn (Rs184bn under RBI scheme). We
expect the asset quality to show a marked improvement in coming quarters.
PO, earnings cut due to macro headwinds; Reiterate BUY
While earnings were good, we are cutting our PO and forecast earnings to
capture the macro headwinds and also building in the 2
nd
pension hit (though it’s
not crystallized). PO cut by +10-11% to Rs3400 and earnings by 2/8/8% in
FY11/12/13. But SBI still remains amongst our preferred picks, with earnings
growth forecast at +35/30% in FY12/13; RoE rising to +19% (standalone) and
trading at <1.7x FY12 adj. BV. Further, it is most leveraged to improving macros
and rate cycle. Non-banks biz. add another Rs269/share (after 10% Holdco disc.).
3QFY11 results overview
Earnings beat est. driven by topline and stabilizing asset quality
SBI’s 3QFY11 earnings at Rs28.3bn were 8% ahead of estimates and grew 14%
yoy driven by stronger than expected topline. The key fear that the street had on
SBI was topline and asset quality, both of which have shown better than expected
performance.
Topline surprises on margins, CASA and, volumes
Topline grew +43% yoy (13% ahead) and was driven by 22% yoy loan growth
(large corporate growth at 28% yoy). But more importantly, the strong topline
growth driver was margins, which expanded by 79bps yoy and 18bps qoq to
+3.6% as SBI is one of the few banks to still see a contraction in cost of deposits
(72bps yoy and 5bps qoq). Margin support also came from a sustained rise in
CASA deposits (ratio up 523bps yoy and 38bps qoq) to 48.2%.
Loan growth driven by large corporate group (up 28% yoy) followed by retail
loan growth of 24% yoy (home loans 22% yoy, auto loans up 52% yoy). SME loan
growth was 21% yoy agriculture loan growth at 17% yoy, international loan
growth at 18% yoy and, mid-corporate loan growth at 18% yoy.
Asset quality appears to be stabilizing; net accretion down 25% qoq
Asset quality also appears to be stabilizing, with slippages (new) down to
Rs31.5bn vs. +Rs44bn (adjusted for St. Bk of Indore NPLs) in 2Q and Rs41bn in
1Q. But, for Rs7.8bn, which the bank was not netting from gross NPLs earlier
owing to that amount being unrealized interest on NPLs and hence slippages are
higher to that extent to Rs39bn, but simultaneously, recoveries are also higher by
the same amount as these NPLs were fully provided for, so no P&L impact.
However, net accretion (slippages less recoveries and upgradations) are down
25% qoq to Rs17bn.
Almost 50% of the fresh slippages have come from corporate banking group.
Resultantly, headline NPLs are flat qoq. Gross NPL% is down to 18bps qoq and
net is down 9bps qoq. Provision cover at +64% now vs. 62.8% in 2Q.
Restructured asset totaled Rs328bn of which under RBI scheme were Rs184bn
and the balance under bank’s scheme. Of the total Rs21bn of fresh restructuring
in 3Q, Rs15bn odd came from Kingfisher debt restructuring which has happened
at sector level. Total slippages from restructured a/c’s is at 13.5%, while
individually, under RBI scheme is 15.7% and under bank’s scheme is 10.7%.
Core fee growth was only 13% yoy, but for change in accounting, net ATM
interchange fee of Rs2.2bn for entire 9MFY10 was added to fee income in
3QFY10. Adjusting on pro rata basis, yoy growth in fee income would be +21%
for 3QFY11. The major contributors to fee income growth were commission from
government business, commission from cross selling, loan processing charges,
underwriting fees and commission from LC/BG business
Opex was up only 11% yoy and was 6% below estimates as the bank had a
write-back of excess wage provision of Rs390mn in 3Q. Staff cost also includes
Rs1.4bn towards gratuity in 3Q and ~Rs15bn for 9MFY11.
Performance of SBI associate banks and key subsidiaries
We highlight below key subsidiaries and associate banks performance during
3QFY11:
„ Associate Banks: Net interest income has grown +46% yoy in Dec’10 for
associate banks. NIMs improved +52bps YTD (since Mar’10) and are up
7bps qoq. Net Profit grew 16% in 9MFY11 on account of higher provisions
for employee benefits and NPL related provisions. Loans have grown +18%
yoy and deposits at ~13% yoy as on Dec’10, with CASA at ~32.5%. Total
CAR for associate bank is 13.2% and Tier 1 is 8.7%. Gross NPLs at ~2.4%
and net NPLs at 1.1%.
„ SBI Life has recorded a profit of ~Rs0.8bn in 3QFY11 (Rs3bn in 9MFY11
and Rs2.2bn in 1H). Renewal premium growth for SBI Life is up 87% yoy.
„ SBI Caps has posted a PAT of Rs0.6bn in 3QFY11 (Rs3.2bn in 9M, a yoy
growth of +180%).
Cut earnings by ~2/8%; growth at +35/30% in FY12/13
We have cut our earnings by ~2% for FY11 and more than 8% each for FY12/13.
Lower earnings cut in FY11 are owing to very strong and sustained topline
growth. Higher FY12/13 earnings cut to factor in macro headwinds and also
building in the 2
nd
pension hit (though it’s not crystallized). However, earnings are
likely to grow at +35/30% in FY12/13 owing to unwinding of credit costs.
Opex growth est. at 10% in FY12/13 factoring possible pension liab.
We are still building in opex growth of 10% yoy sustaining, as SBI, in our view
could have additional liability of Rs60-65bn (as pension liability has been
estimated without considering the ninth bipartite settlement, as the final approval
from the govt. for revision in pension on the basis of revised salaries is still
pending).
However, SBI has taken gratuity provision of ~Rs15bn in 9MFY11 and expected
at ~Rs19-20bn by FY11 that is partly offset by Rs10bn of excess wage revision
write-backs, which are one-off’s (owing to wage revisions) and unlikely to be there
next year and hence, will likely set-off additional pension provisions required.
Operating profit growth at +55/20/20% in FY11/12/13
Operating earnings (pre-provision profits excluding trading profits) growth to be
much stronger at +55% in FY11 and sustain at +20% in FY12/13. This is driven
by +15-16% topline growth (margins flattish yoy in FY12) and opex growth 10-
11% after factoring in possible pension hits. Further, the C-I ratio should trend
down – owing to better revenues.
NPL accretion at Rs+165bn est. in FY11
As seen in 3Q earnings, SBI’s slippages (fresh) are down 11% qoq and net
accretion is down 25% qoq. But we conservatively estimate accretion levels in
FY11 at +Rs165bn (2.6% -1-yr lag). Hence, we still forecast a +30% rise in
headline gross NPL’s in FY11 after factoring in recoveries (absolute levels).
Moreover, net accretion (additions –recoveries + upgradations) still estimated at
Rs85bn (Rs60bn in 9MFY11) vs. Rs58bn in FY10. Accordingly, we estimate
gross and net NPLs at 3.2% and 1.5%, resp
We are, in our est., modeling in credit costs at ~110bps resulting in lower levels of
net NPLs (%) and reported provision cover rising to 53% in FY11 (from 44% in
FY10), excluding technical write-offs (incl. this cover at +66% by FY11).
SOTP – Cut non-bank subs by 5% on life ins.
We have cut our non-bank value by 5% to factor in a contraction in SBI Life insurance
new- business premia contraction by 8% yoy in FY11 vs. 2% growth earlier. Our value
on life insurance biz. is based on combing the “derived” embedded value and
assigning a multiple (9x for FY12) for “new” biz. We remain positive on SBI Life’s
prospects as we believe players like SBI are in a very strong position on economies of
scale, already reporting profits, and adopting a bancassurance model, which will give
itself an edge vis-à-vis other players in this uncertain scenario.
Valuing ‘total banking’ biz.’
If we were to even consolidate the associate banks, the combined adjusted BV of
the entire banking biz. is estimated at Rs1161 for FY11 and Rs1420 for FY12 with
ROE forecast at ~21% by FY12 for the banking business. The banking biz. (premoney) trading at +2.1-2.2x FY11 (1.6x FY12) book can sustain at these levels in
FY12, implying a price of Rs3,139; adding Rs269 (10% holding discount) for nonbank subs we get our PO of Rs3400.
Price objective basis & risk
SBI (SBINF / SBKFF)
Our PO on SBI is Rs3400, as with earnings growth is forecast at +35/30% in
FY12/13, RoE rising to +19% and trading at <1.6x FY12 adj. BV. Further, it is
most leveraged to improving macros and rate cycle. Non-banks biz. add another
Rs269/share.
Our PO is benchmarked to Gordon modle theory where we assume RoE of 19pct
and CoE OF 14% and assign a 60% premium to theoritical multiples owing to its
large liability franchise and dominant position in the market (+23pct market share
at group level). On a PE basis, the stock is trading at 7.7x FY12E if we adjust the
share price for the subsidiary value. Risks are a sharp rise in NPLs and a hike in
interest rates.
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