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State Bank of India (SBI) reported strong operating performance in Q3FY11, with NII
growing 43% Y-o-Y (11% Q-o-Q) to INR 90.4 bn (ahead of our estimate of INR 82.5
bn). To everyone’s surprise, NIMs (reported) expanded 18bps, to 3.61%, benefiting
from strong accretion in CASA deposits and increase in base rate/PLR. Retail term
deposit mobilisation was slow, despite 150bps cumulative rate hike in August and
October. Staff expenses came off 5% Q-o-Q, as it made lower provisioning towards
gratuity (overall liability revised downwards), while it has not yet provided for the
wage hike impact on pension. Provisioning was lower, as incremental slippages came
off and the bank has not yet created standard provisioning on special scheme home
loan book. PAT came in at INR 28.2 bn (in line), as benefits of NIMs and lower opex
got offset by higher tax (40%) and muted fee income.
Margins expand, supported by CASA and hike in lending rate
NIMs improved 18bps Q-o-Q, to 3.6% (contrary to Street’s expectation of
decline), supported by: (a) strong CASA accretion of INR 16.5 bn improving
CASA ratio to 48.2% (from 47.8% in Q2FY11) (SBI the only bank to report
decline in cost of deposits for eight consecutive quarters); (b) improvement in
CD ratio by more than 300bps to 84.2% (domestic CD ratio at 77%); and (c)
hike in PLR by 25bps in October and base rate by 10bps in December. Expansion
in NIMs, coupled with robust loan growth (~7% Q-o-Q), helped the bank record
robust NII growth. Bulk deposits, inched up to INR 874 bn (9.9% of deposits),
after declining to a low of INR 780 bn (9.1% of deposits) in Q2FY11; retail
deposits remained flat sequentially (despite two deposit rate hikes during the
quarter). Going forward, with credit growth picking up and CD ratio touching a
high of 77%, we believe SBI will have to step up its deposit growth, which could
raise funding costs. Though NIM may hold on for a quarter, it is likely to trend
downwards later on. Hence, we build in 2.8-2.9% NIMs (cal.) over FY11-12.
Outlook and valuations: Headwinds sill persist; maintain ‘HOLD’
SBI has been surprising positively on margins since the past few quarters,
reflecting the strength in its liability franchise in mobilising CASA deposits.
However, feeble pick up in retail term deposits, despite rate hikes, continue to
be a cause of concern. We are revising our NII estimate upwards, but believe
other headwinds remain. Provisioning could rise as slippages are expected at
higher levels than peers (though lower than current run-rate) and there is
uncertainty over the standard asset provisioning on special home loans.
Moreover, the bank’s investment portfolio is more vulnerable to gsec yield
movement. Even wage hike impact on pension provisioning could be a dampener
to earnings. The near-term positive trigger we see in the stock is the rights
issue. After adjusting for subsidiaries, the bank is trading at 1.6x FY12E
consolidated book, generating RoE of 18%. Though we are positive on the
strength of SBI’s liability franchise, we prefer BOB and PNB at current valuations.
We maintain ‘HOLD/Sector Performer’ recommendation/rating on the stock.
Slippages running high; no standard provisioning on special home loans
Incremental slippages continued to be in excess of 2% in Q3FY11 (at INR 39 bn). The
bank has reversed INR 7.6 bn of balance in URIPY in Q3FY11 to the respective borrower
account as stipulated by RBI. Consequently, the reported slippages and
recoveries/upgradations were net off this adjustment. Upgradations and recoveries
continued at the run-rate of ~INR 21 bn, while write offs were high at INR 14.9 bn (INR
14.2 bn in H1FY11). We expect recoveries to be stronger in Q4FY11 (a year end
phenomenon). Headline asset quality numbers remained stable; gross NPAs increased
marginally by 1% Q-o-Q to INR 234 bn (3.17%), while net NPAs increased 0.8% Q-o-Q
to INR 117 bn (1.61%). Agriculture (INR 2.6 bn), retail (INR 1.9 bn) and international
(INR 440 mn) were the key contributors to increase in GNPA, while mid corporate and
SMEs saw a decline. While we expect slippages to come off from the current run-rate, we
believe they will remain higher than the industry average.
Loan provisions for the quarter came in at INR 16.3 bn (94bps; 96bps for FY10).
Provision coverage (including AUCA) improved ~130bps to 64%; management has to
reach the target of 70% by September 2011. SBI has not created standard asset
provisioning on special home loan schemes of INR 300 bn at the rate of 2%.
Outstanding restructured amount increased by 7% Q-o-Q to INR 327.5 bn (4.4% of
advances); cumulative slippages in restructured book stood at 13.5% (RBI: 15.68%,
bank: 10.7%). Restructured book under RBI scheme grew 9.5% Q-o-Q to INR 183.9 bn
(capturing the aviation exposure during the quarter); 2.4% of the book slipped during
the quarter. Management expects another INR 4 bn to slip from the restructured book in
the near term.
Business momentum picks up
Loan book grew 6.7% Q-o-Q and 22% Y-o-Y (including 3-4ppt contribution of SB-Indore)
to INR 7.39 tn. Traction remained strong in large corporates (13.7% Q-o-Q), SME
(10.6% Q-o-Q) and auto loans (12.5% Q-o-Q) segments. International book continued
to report strong traction (despite adverse currency movement) and grew 4.8% Q-o-Q
(on INR basis) to INR 1.1 tn. Deposits grew 3% Q-o-Q and 14% Y-o-Y to INR 8.8 tn.
Growth in CASA deposits, at 3.6% Q-o-Q, outpaced the overall deposit growth. CD ratio
(domestic) increased 250bps to 77.2%. We are building in loan growth of 22% over
FY10-12E.
Gratuity liability revised down; wage revision catch up on pension unprovided
Staff expenses declined 4.5% Q-o-Q as the bank provided only INR 1.4 bn for gratuity
(against INR 3 bn in Q2FY11), on account change in yield assumption resulting in
downward revision in overall gratuity liability (now estimated at INR 19bn). The bank is
yet to provide INR 4-5 bn towards gratuity. Provisions for pensions, gratuity,
compensated absences (amounting to INR 3.8bn) were made during the quarter; barring
pensions (where impact of wage hike has not been captured), impact of both wage
inflation and wage hike has been captured for the rest.
Other highlights
• Core fee income grew 11.3% Y-o-Y, but remained flat Q-o-Q. Treasury profits stood
at INR 2.2 bn against INR 1.7 bn in Q2FY11. No dividends were booked during the
quarter.
• Management believes that its special loan scheme does not qualify as ‘teaser rate’
scheme; hence, it has not made any provision for the same. The special scheme
accounts for ~INR 300 bn; thus, provisioning amount (to be routed through P&L)
could be of the order of INR 6 bn.
• Other interest income include income tax refund of INR 2.3 bn (compared with INR
3.68 bn in Q3FY10 and INR 1.2 bn in Q2FY11).
• Tax rate during the quarter came in high at 40% as a portion of loan loss provisions
does not qualify for tax benefit.
• Investment depreciation came in at INR 2.08 bn. The bank’s AFS book stands at INR
71.5 bn and has modified duration of 3.5 years.
• Management believes it can pass another 25-50bps to borrowers, beyond which
margins may come under pressure
Company Description
SBI is India’s largest commercial bank with an balance sheet size of INR 11 tn and a
market cap of INR 1.65 tn. It has nearly 12000 branches on standalone basis and 16000
branches including associates. Along with its associates, it has a market share of around
20% in advances and 28% in deposits. Over the past two years, the bank has increased
its focus on retail credit to provide itself the necessary growth momentum and improve
spreads. Retail credit forms 21% of its total loan book. Further, to manage operations
better, SBI has integrated its treasury operations and has a common technology
platform across all its six subsidiary banks. In FY09, the bank merged State Bank of
Saurashtra with itself. This has increased synergies amongst its banking subsidiaries.
Investment Theme
We expect SBI to be the biggest beneficiary of buoyant economic outlook, pick up in
corporate credit, continued retail credit growth, given its extensive reach and client
relationships. We expect the bank to attain over 20% CAGR in loan book over next three
years. Medium sized corporate, retail, and international businesses would be the key
growth drivers for the bank. Of SBI’s six associate banks, State Bank of Travancore,
State Bank of Mysore, and State Bank of Bikaner and Jaipur are already listed.
Management has expressed its intent to unlock values of its investment in associate
banks through a public issue. We are positive about the long term potential of this stock,
given its wide network and strong franchise.
Key Risks
• Macro economic risk is the biggest risk for SBI, given its size and exposures.
• Post loan waiver announcement asset quality risks have increased
• Given the pace of its expansion delinquencies might rise faster than our assumption
• Increasing geographic penetration by newer private sector banks can lead to faster
than expected decline in market share.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
State Bank of India (SBI) reported strong operating performance in Q3FY11, with NII
growing 43% Y-o-Y (11% Q-o-Q) to INR 90.4 bn (ahead of our estimate of INR 82.5
bn). To everyone’s surprise, NIMs (reported) expanded 18bps, to 3.61%, benefiting
from strong accretion in CASA deposits and increase in base rate/PLR. Retail term
deposit mobilisation was slow, despite 150bps cumulative rate hike in August and
October. Staff expenses came off 5% Q-o-Q, as it made lower provisioning towards
gratuity (overall liability revised downwards), while it has not yet provided for the
wage hike impact on pension. Provisioning was lower, as incremental slippages came
off and the bank has not yet created standard provisioning on special scheme home
loan book. PAT came in at INR 28.2 bn (in line), as benefits of NIMs and lower opex
got offset by higher tax (40%) and muted fee income.
Margins expand, supported by CASA and hike in lending rate
NIMs improved 18bps Q-o-Q, to 3.6% (contrary to Street’s expectation of
decline), supported by: (a) strong CASA accretion of INR 16.5 bn improving
CASA ratio to 48.2% (from 47.8% in Q2FY11) (SBI the only bank to report
decline in cost of deposits for eight consecutive quarters); (b) improvement in
CD ratio by more than 300bps to 84.2% (domestic CD ratio at 77%); and (c)
hike in PLR by 25bps in October and base rate by 10bps in December. Expansion
in NIMs, coupled with robust loan growth (~7% Q-o-Q), helped the bank record
robust NII growth. Bulk deposits, inched up to INR 874 bn (9.9% of deposits),
after declining to a low of INR 780 bn (9.1% of deposits) in Q2FY11; retail
deposits remained flat sequentially (despite two deposit rate hikes during the
quarter). Going forward, with credit growth picking up and CD ratio touching a
high of 77%, we believe SBI will have to step up its deposit growth, which could
raise funding costs. Though NIM may hold on for a quarter, it is likely to trend
downwards later on. Hence, we build in 2.8-2.9% NIMs (cal.) over FY11-12.
Outlook and valuations: Headwinds sill persist; maintain ‘HOLD’
SBI has been surprising positively on margins since the past few quarters,
reflecting the strength in its liability franchise in mobilising CASA deposits.
However, feeble pick up in retail term deposits, despite rate hikes, continue to
be a cause of concern. We are revising our NII estimate upwards, but believe
other headwinds remain. Provisioning could rise as slippages are expected at
higher levels than peers (though lower than current run-rate) and there is
uncertainty over the standard asset provisioning on special home loans.
Moreover, the bank’s investment portfolio is more vulnerable to gsec yield
movement. Even wage hike impact on pension provisioning could be a dampener
to earnings. The near-term positive trigger we see in the stock is the rights
issue. After adjusting for subsidiaries, the bank is trading at 1.6x FY12E
consolidated book, generating RoE of 18%. Though we are positive on the
strength of SBI’s liability franchise, we prefer BOB and PNB at current valuations.
We maintain ‘HOLD/Sector Performer’ recommendation/rating on the stock.
Slippages running high; no standard provisioning on special home loans
Incremental slippages continued to be in excess of 2% in Q3FY11 (at INR 39 bn). The
bank has reversed INR 7.6 bn of balance in URIPY in Q3FY11 to the respective borrower
account as stipulated by RBI. Consequently, the reported slippages and
recoveries/upgradations were net off this adjustment. Upgradations and recoveries
continued at the run-rate of ~INR 21 bn, while write offs were high at INR 14.9 bn (INR
14.2 bn in H1FY11). We expect recoveries to be stronger in Q4FY11 (a year end
phenomenon). Headline asset quality numbers remained stable; gross NPAs increased
marginally by 1% Q-o-Q to INR 234 bn (3.17%), while net NPAs increased 0.8% Q-o-Q
to INR 117 bn (1.61%). Agriculture (INR 2.6 bn), retail (INR 1.9 bn) and international
(INR 440 mn) were the key contributors to increase in GNPA, while mid corporate and
SMEs saw a decline. While we expect slippages to come off from the current run-rate, we
believe they will remain higher than the industry average.
Loan provisions for the quarter came in at INR 16.3 bn (94bps; 96bps for FY10).
Provision coverage (including AUCA) improved ~130bps to 64%; management has to
reach the target of 70% by September 2011. SBI has not created standard asset
provisioning on special home loan schemes of INR 300 bn at the rate of 2%.
Outstanding restructured amount increased by 7% Q-o-Q to INR 327.5 bn (4.4% of
advances); cumulative slippages in restructured book stood at 13.5% (RBI: 15.68%,
bank: 10.7%). Restructured book under RBI scheme grew 9.5% Q-o-Q to INR 183.9 bn
(capturing the aviation exposure during the quarter); 2.4% of the book slipped during
the quarter. Management expects another INR 4 bn to slip from the restructured book in
the near term.
Business momentum picks up
Loan book grew 6.7% Q-o-Q and 22% Y-o-Y (including 3-4ppt contribution of SB-Indore)
to INR 7.39 tn. Traction remained strong in large corporates (13.7% Q-o-Q), SME
(10.6% Q-o-Q) and auto loans (12.5% Q-o-Q) segments. International book continued
to report strong traction (despite adverse currency movement) and grew 4.8% Q-o-Q
(on INR basis) to INR 1.1 tn. Deposits grew 3% Q-o-Q and 14% Y-o-Y to INR 8.8 tn.
Growth in CASA deposits, at 3.6% Q-o-Q, outpaced the overall deposit growth. CD ratio
(domestic) increased 250bps to 77.2%. We are building in loan growth of 22% over
FY10-12E.
Gratuity liability revised down; wage revision catch up on pension unprovided
Staff expenses declined 4.5% Q-o-Q as the bank provided only INR 1.4 bn for gratuity
(against INR 3 bn in Q2FY11), on account change in yield assumption resulting in
downward revision in overall gratuity liability (now estimated at INR 19bn). The bank is
yet to provide INR 4-5 bn towards gratuity. Provisions for pensions, gratuity,
compensated absences (amounting to INR 3.8bn) were made during the quarter; barring
pensions (where impact of wage hike has not been captured), impact of both wage
inflation and wage hike has been captured for the rest.
Other highlights
• Core fee income grew 11.3% Y-o-Y, but remained flat Q-o-Q. Treasury profits stood
at INR 2.2 bn against INR 1.7 bn in Q2FY11. No dividends were booked during the
quarter.
• Management believes that its special loan scheme does not qualify as ‘teaser rate’
scheme; hence, it has not made any provision for the same. The special scheme
accounts for ~INR 300 bn; thus, provisioning amount (to be routed through P&L)
could be of the order of INR 6 bn.
• Other interest income include income tax refund of INR 2.3 bn (compared with INR
3.68 bn in Q3FY10 and INR 1.2 bn in Q2FY11).
• Tax rate during the quarter came in high at 40% as a portion of loan loss provisions
does not qualify for tax benefit.
• Investment depreciation came in at INR 2.08 bn. The bank’s AFS book stands at INR
71.5 bn and has modified duration of 3.5 years.
• Management believes it can pass another 25-50bps to borrowers, beyond which
margins may come under pressure
Company Description
SBI is India’s largest commercial bank with an balance sheet size of INR 11 tn and a
market cap of INR 1.65 tn. It has nearly 12000 branches on standalone basis and 16000
branches including associates. Along with its associates, it has a market share of around
20% in advances and 28% in deposits. Over the past two years, the bank has increased
its focus on retail credit to provide itself the necessary growth momentum and improve
spreads. Retail credit forms 21% of its total loan book. Further, to manage operations
better, SBI has integrated its treasury operations and has a common technology
platform across all its six subsidiary banks. In FY09, the bank merged State Bank of
Saurashtra with itself. This has increased synergies amongst its banking subsidiaries.
Investment Theme
We expect SBI to be the biggest beneficiary of buoyant economic outlook, pick up in
corporate credit, continued retail credit growth, given its extensive reach and client
relationships. We expect the bank to attain over 20% CAGR in loan book over next three
years. Medium sized corporate, retail, and international businesses would be the key
growth drivers for the bank. Of SBI’s six associate banks, State Bank of Travancore,
State Bank of Mysore, and State Bank of Bikaner and Jaipur are already listed.
Management has expressed its intent to unlock values of its investment in associate
banks through a public issue. We are positive about the long term potential of this stock,
given its wide network and strong franchise.
Key Risks
• Macro economic risk is the biggest risk for SBI, given its size and exposures.
• Post loan waiver announcement asset quality risks have increased
• Given the pace of its expansion delinquencies might rise faster than our assumption
• Increasing geographic penetration by newer private sector banks can lead to faster
than expected decline in market share.
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