State Bank of India Improving core, but earnings headwinds persist; Sell : Anand rathi

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State Bank of India
Improving core, but earnings headwinds persist; Sell
SBI reported 14.1% yoy rise in net profit, led by strong net
interest income (NII) and lower staff costs. We raise our net
profit estimate 8.2% for FY11e and 4.2% for FY12e, owing to
higher NIM led by higher CASA share estimate. We retain Sell,
as SBI’s high employee liabilities and provisions to raise NPA
coverage would keep RoE lower than peers’.

 Strong NII growth led by rise in credit-to-deposit. NII grew
43.3% yoy, led by 574bps rise in C/D to 77.2%. NIM improved
79bps yoy to 3.61% on the back of a 523bps increase in CASA
share to 48.2%. However, given rising liability costs and a
stretched C/D, NIM has little scope for significant gains ahead.
 Lower employee expenses. Staff costs dipped 4.5% qoq due to
reversal of provisions for wage revisions (`385m). SBI estimates
its employee gratuity liabilities at `19bn, for which it has made
provisions of ~`15.4bn in 9MFY11. We expect higher provisions
for employee liabilities to impede profitability going forward.
 Asset quality still suspect. Fresh slippages of `39bn indicate
that asset quality is still suspect. Restructured loans rose 9.5% qoq,
of which 15.7% (`28.9bn) are NPAs. Additional provisions to
reach the 70% NPA coverage (64.1% at present) and incremental
loan defaults pose a risk to earnings growth.
 Valuation and risks. We raise our target price to `2,585 from
`2,499. We value the standalone bank at `2,043 (1.4x FY12e BV).
We value the subsidiaries at `541. Key risk: Lower credit costs.