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State Bank of India (SBIN)
Banks/Financial Institutions
Power of liability franchise is playing out. SBI reported above-expected nos with
better margins (up 20 bps qoq to 3.6%), steady CASA ratio (48%), lower slippages and
controlled asset quality and above-expected earnings growth at 14% yoy. The
management guided for a strong outlook on margins (likely to sustain in 4Q) and asset
quality (slippages to decline), even as they catch up with provisioning coverage and
retirement benefit provisions, which impacts the bottom line in the near term. In light
of the attractive valuations (1.5XFY2012E PBR) and very low street expectations, we
expect the stock to trade very strong in the near term. BUY.
Strong margins strengthening earnings profile
SBI’s margins further expanded by 20 bps to 3.6%, on the back of its strong liability profile
coupled with lending rate hikes. SBI has taken further lending rate hikes from January 2011 (PLR
increased by 25 bps and base rate by 40 bps) and on the back of this, management expects
margins to further improve despite rising deposit costs. On asset quality, while the slippages at `38
bn (2.3%) were better than the recent trend, the management guided that they expect a declining
trend in terms of the slippages over next few quarters, even as recoveries are likely to remain
stronger. During the quarter, both gross NPLs and net NPLs were almost flat qoq, as compared to
a consistent increase over last 7 quarters.
We are also pleasantly surprised by the strength in margins and believe that strong margins to
continue, albeit at lower than current levels, as long as the rising interest rate trend/tight liquidity
continue. Higher margins will also allow SBI to take care of the additional pension expenses and
higher provisioning required in FY2012E as well. We expect EPS CAGR of 25% over FY2011-13%.
Post 3Q, we broadly maintain our earnings for FY2011-13. Valuations at 1.4XFY2012E
consolidated PBR remains attractive. BUY with a TP of `3,400 (`3,500 earlier).
Margins improve as funding costs decline – reflecting the strength of liability franchise
Margins increase was a positive surprise and it happened on back of rising lending yields (8 bps
qoq to 9.6%) coupled with stable funding costs (at 5.2%, 5 bps decline qoq). Franchise strength is
playing out well for the bank as mobilization of CASA deposits continues to remain impressive in a
rising interest rate environment. CASA ratio improved 40 bps qoq to 48%. CD ratio for the
quarter increased to 83% (domestic CD ratio at 77% compared to 75% in September 2010)
providing cushion to margin expansion during the quarter. Management guides of sustaining
margins at current levels, on back of a reasonable pricing power coupled with stable funding
costs. While management guidance on margins remains strong, we build in some margin
contraction in our earnings – expect to decline by about 15 bps each in 4QFY11E and FY2012E.
Slippages decline; Gross NPLs remain stable
Gross NPLs for the quarter were at `234 bn (3.2% of loans) compared to `232 bn (3.4% of
loans in September 2010). Net change in NPL was actually higher than reported as the bank
made an adjustment by removing interest on NPL of previous year from gross NPL of about
`7.7 bn following RBI’s guidelines.
Slippages were at 2.3% against 2.7% as of September 2010. Unadjusted for this, fresh
slippages (1.9% of loans) for the quarter was from corporate (2.6% loans), agriculture
(2.8% of loans) and retail (1.8% of loans). Net NPL was flat qoq at `117 bn (1.6% of loans).
We are building slippages of 1.8% in FY2012E and 1.6% in FY2013E.
The bank’s outstanding restructured book was at `328 bn (4.5% of loans). Fresh
restructuring was at `20.1 bn which includes a special dispensation for airlines. Slippage
from the restructured book (special dispensation) has increased to 15.7% compared to
14.5% in the previous quarter.
Loan loss provisions decline qoq; 0.9% of loans
Provision coverage (including write-off) improved by about 130 bps to 64% in December
2010 from 63% in September 2010 while reported coverage ratio has remained flat at 50%
excluding write-offs. Loan loss provisions for the quarter declined to 0.9% compared to
1.3% in 2QFY11. The bank wrote off nearly `15 bn of loans in the current quarter. We
expect provisioning requirement to start declining from FY2012E, as slippages ease from
current levels coupled with no catch up on provision coverage required. While provisions
continues to remain higher, the strong margins is currently providing adequate cushion
without seriously impairing return ratios.
Loan growth below industry average; weak performance in select segments
Overall loans grew by 22% yoy (lower than industry trends, 18% excluding the impact of
merger of SBI Indore) and 7% qoq to `7.4 tn as of December 2010. Agriculture and midcorporate
segment has grown below average but retail and SME segment showed strong
growth. Housing loans grew by 23% yoy and 4% qoq with the teaser loans portfolio of
about ` 300 bn. Deposits grew by 14% yoy and 3% qoq to `8.8 tn. Bulk deposits to total
deposits is at 10% (marginally higher than the previous quarter).
Savings deposits growth commendable; CASA share improved 40 bps qoq
Despite pressure visible in the industry on CASA ratio, SBI has been able to improve its CASA
ratio by 40 bps qoq to 48% as of December 2010. Growth in current account deposits has
been impressive at 17% yoy as industry growth has been moderate. Investments in
technology and focusing on corporate/government clients for savings accounts continues to
reap rewards for the bank with savings deposits growing by 30% yoy (5% qoq).
Cost-income ratio at 45% supported by lower staff expenses
Cost-income ratio for the quarter was at 45%, ahead of expectations, as the bank made
lower retirement provisions. The bank provided `1.4 bn for revised gratuity benefits during
the quarter as a higher interest rate reduced the retirement burden. The bank is yet to
ascertain the liability on pension as it seeks clarity on liability (SBI pension policy is yet to be
ratified by the management and is different compared to other public sector banks). We are
building improvement in cost-income ratio at 46% in FY2012 to factor (1) completion of
peak infrastructure investments and (2) marginal provision for expected liability on account
of pension.
Other key financial highlights in 3QFY11
Treasury income was `2.2 bn (down 50% yoy). Fee income growth was subdued at `24.7
bn — 16% sequential decline.
Consolidated earnings grew by 14% yoy to `38 bn in 3QFY11 on the back of better
earnings growth (16% yoy) in banking subsidiaries. Consolidated NII grew 40% to `123
bn. SBI Life has recorded a profit of `842 mn for 3QFY11 while SBI Capital Markets
posted a profit of `553 mn.
Restructured loans increased by `20 bn during the quarter, on the back of the
restructuring done for specific account in aviation sector
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� �
State Bank of India (SBIN)
Banks/Financial Institutions
Power of liability franchise is playing out. SBI reported above-expected nos with
better margins (up 20 bps qoq to 3.6%), steady CASA ratio (48%), lower slippages and
controlled asset quality and above-expected earnings growth at 14% yoy. The
management guided for a strong outlook on margins (likely to sustain in 4Q) and asset
quality (slippages to decline), even as they catch up with provisioning coverage and
retirement benefit provisions, which impacts the bottom line in the near term. In light
of the attractive valuations (1.5XFY2012E PBR) and very low street expectations, we
expect the stock to trade very strong in the near term. BUY.
Strong margins strengthening earnings profile
SBI’s margins further expanded by 20 bps to 3.6%, on the back of its strong liability profile
coupled with lending rate hikes. SBI has taken further lending rate hikes from January 2011 (PLR
increased by 25 bps and base rate by 40 bps) and on the back of this, management expects
margins to further improve despite rising deposit costs. On asset quality, while the slippages at `38
bn (2.3%) were better than the recent trend, the management guided that they expect a declining
trend in terms of the slippages over next few quarters, even as recoveries are likely to remain
stronger. During the quarter, both gross NPLs and net NPLs were almost flat qoq, as compared to
a consistent increase over last 7 quarters.
We are also pleasantly surprised by the strength in margins and believe that strong margins to
continue, albeit at lower than current levels, as long as the rising interest rate trend/tight liquidity
continue. Higher margins will also allow SBI to take care of the additional pension expenses and
higher provisioning required in FY2012E as well. We expect EPS CAGR of 25% over FY2011-13%.
Post 3Q, we broadly maintain our earnings for FY2011-13. Valuations at 1.4XFY2012E
consolidated PBR remains attractive. BUY with a TP of `3,400 (`3,500 earlier).
Margins improve as funding costs decline – reflecting the strength of liability franchise
Margins increase was a positive surprise and it happened on back of rising lending yields (8 bps
qoq to 9.6%) coupled with stable funding costs (at 5.2%, 5 bps decline qoq). Franchise strength is
playing out well for the bank as mobilization of CASA deposits continues to remain impressive in a
rising interest rate environment. CASA ratio improved 40 bps qoq to 48%. CD ratio for the
quarter increased to 83% (domestic CD ratio at 77% compared to 75% in September 2010)
providing cushion to margin expansion during the quarter. Management guides of sustaining
margins at current levels, on back of a reasonable pricing power coupled with stable funding
costs. While management guidance on margins remains strong, we build in some margin
contraction in our earnings – expect to decline by about 15 bps each in 4QFY11E and FY2012E.
Slippages decline; Gross NPLs remain stable
Gross NPLs for the quarter were at `234 bn (3.2% of loans) compared to `232 bn (3.4% of
loans in September 2010). Net change in NPL was actually higher than reported as the bank
made an adjustment by removing interest on NPL of previous year from gross NPL of about
`7.7 bn following RBI’s guidelines.
Slippages were at 2.3% against 2.7% as of September 2010. Unadjusted for this, fresh
slippages (1.9% of loans) for the quarter was from corporate (2.6% loans), agriculture
(2.8% of loans) and retail (1.8% of loans). Net NPL was flat qoq at `117 bn (1.6% of loans).
We are building slippages of 1.8% in FY2012E and 1.6% in FY2013E.
The bank’s outstanding restructured book was at `328 bn (4.5% of loans). Fresh
restructuring was at `20.1 bn which includes a special dispensation for airlines. Slippage
from the restructured book (special dispensation) has increased to 15.7% compared to
14.5% in the previous quarter.
Loan loss provisions decline qoq; 0.9% of loans
Provision coverage (including write-off) improved by about 130 bps to 64% in December
2010 from 63% in September 2010 while reported coverage ratio has remained flat at 50%
excluding write-offs. Loan loss provisions for the quarter declined to 0.9% compared to
1.3% in 2QFY11. The bank wrote off nearly `15 bn of loans in the current quarter. We
expect provisioning requirement to start declining from FY2012E, as slippages ease from
current levels coupled with no catch up on provision coverage required. While provisions
continues to remain higher, the strong margins is currently providing adequate cushion
without seriously impairing return ratios.
Loan growth below industry average; weak performance in select segments
Overall loans grew by 22% yoy (lower than industry trends, 18% excluding the impact of
merger of SBI Indore) and 7% qoq to `7.4 tn as of December 2010. Agriculture and midcorporate
segment has grown below average but retail and SME segment showed strong
growth. Housing loans grew by 23% yoy and 4% qoq with the teaser loans portfolio of
about ` 300 bn. Deposits grew by 14% yoy and 3% qoq to `8.8 tn. Bulk deposits to total
deposits is at 10% (marginally higher than the previous quarter).
Savings deposits growth commendable; CASA share improved 40 bps qoq
Despite pressure visible in the industry on CASA ratio, SBI has been able to improve its CASA
ratio by 40 bps qoq to 48% as of December 2010. Growth in current account deposits has
been impressive at 17% yoy as industry growth has been moderate. Investments in
technology and focusing on corporate/government clients for savings accounts continues to
reap rewards for the bank with savings deposits growing by 30% yoy (5% qoq).
Cost-income ratio at 45% supported by lower staff expenses
Cost-income ratio for the quarter was at 45%, ahead of expectations, as the bank made
lower retirement provisions. The bank provided `1.4 bn for revised gratuity benefits during
the quarter as a higher interest rate reduced the retirement burden. The bank is yet to
ascertain the liability on pension as it seeks clarity on liability (SBI pension policy is yet to be
ratified by the management and is different compared to other public sector banks). We are
building improvement in cost-income ratio at 46% in FY2012 to factor (1) completion of
peak infrastructure investments and (2) marginal provision for expected liability on account
of pension.
Other key financial highlights in 3QFY11
Treasury income was `2.2 bn (down 50% yoy). Fee income growth was subdued at `24.7
bn — 16% sequential decline.
Consolidated earnings grew by 14% yoy to `38 bn in 3QFY11 on the back of better
earnings growth (16% yoy) in banking subsidiaries. Consolidated NII grew 40% to `123
bn. SBI Life has recorded a profit of `842 mn for 3QFY11 while SBI Capital Markets
posted a profit of `553 mn.
Restructured loans increased by `20 bn during the quarter, on the back of the
restructuring done for specific account in aviation sector
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