State Bank of India (SBI) Upgrade to ACCUMULATE on valuations: Emkay

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State Bank of India

Upgrade to ACCUMULATE on valuations

ACCUMULATE

CMP: Rs 2,598                                       Target Price: Rs 3,000

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n     SBI’s NII at Rs90.5bn and net profit at Rs28.3bn were better than consensus estimates although the slippages continued to remain high at Rs39bn (Rs32bn in Q2FY11 excl SBIndore)

n     Key positive of operating performance (1) CASA continued to expand to 48% (2) NIMs maintained at 3.0% and (3) continued lower repricing of legacy deposits

n     SBI’s PCR at 64%. Guided no need for teaser rate loan provisions. Also guided reduction in slippages driven by lower NPAs from restructured asset and agri

n     Operating performance likely to remain strong. Slippages may come down in coming quarters. Valuations now reasonable at 1.6x FY12E conso banking ABV. Upgrade to ACCUMULATE

NII growth ahead of expectations driven by NIMs

SBI reported 11.5% qoq growth in NII to Rs90.5bn, far ahead of consensus estimates.

The better than expected growth was driven by 5bps qoq expansion in NIMs and a

higher domestic CDR of 77.2% up 250bps qoq.

NIMs may remain stable as old deposits come for repricing
During Dec-2008, SBI had accumulated large quantum of long term deposits at high
rates. These deposits are due for repricing over CY11 (largely in Dec-11). This repricing
of deposits would help SBI to maintain NIMs at current levels.

Retail, mid and large corporate drive advances growth
The advance grew by 6.7% qoq to Rs7.3tn. The growth was driven by retail, mid and large
corporate book.

Fee income keeps momentum
The traction in fee income continued to remain strong as it grew by 27% yoy adjusted for
accounting changes. The trading gains almost halved in line with expectations

Core operating profit grows by 60%yoy
Driven by the strong growth in operating revenues, the core operating profit has grown by
60% yoy and 6.4% qoq.

Pension liabilities not yet ascertained
Although, SBI is fully pension paying banks, they will have to revise their pension liabilities
under the ninth bipartite agreement for higher basic salaries and DAs. The bank has not
ascertained its liabilities yet and also not provided for the same. We believe that the liability
could be anywhere between Rs1.5-2.0bn.
PCR could have been higher if not for technical reasons
During the quarter, SBI has converted provisions worth Rs10.9bn into write offs resulting in
~116bps lower PCR of 64.07%. Had it not been done the CDR would have been at 65.23%.
Lower provisions due to some write backs; teaser rate provisions not done
During the quarter, SBI adjusted the unrealized interest for previous years of Rs7.6bn
against slippages under the RBI instructions resulting in lower gross NPAs of Rs234bn.
Resultantly the provision requirement for the quarter has also been low. Also on
incremental slippages, the provisioning has been done at rate of 60%.
SBI has not done any teaser rate loan provisions as it doesn’t believe that its mortgage
loans are teaser rate loans. The rationale given by the management is that that the eligibility
of the borrower for these loans is decided on the basis of the EMI calculated on probable
floating rate but loans are given at fixed rate. Thus, it’s not a fixed rate loan but it’s more like
a discount given on the floating rate loan.

High slippages continue; likely to come down in H1CY11
The slippages during the quarter were high at Rs39bn (including technical adjustments)
higher than Rs32bn in Q2FY11 (excluding SBIndore). Around Rs28.9bn of the
outstanding restructured assets slipped till date, resulting in a slippage ratio of
15.7%. The slippages in restructured portfolio during the quarter was in line with
management’s guidance of Rs5bn for Q3FY11.
The management has guided for reduction in slippages in coming quarters from the
agriculture and restructured advances. Sector wise, exposure to MFIs is around ~Rs11bn
and to new 2G players is Rs36bn

Valuation and view
Our underlying argument for negative stand on the stock has been its high slippages.
However, we believe that from H1CY11 onwards the slippage number is likely to come
down with NPAs in agriculture and restructured asset portfolio likely to taper off. The
operating numbers have been strong for past few quarters and are likely to remain so. We
have revised our FY11E EPS by ~5.5% due to the higher tax rate for the quarter.
At CMP, the stock trades at 2.0x/1.6x FY11E/12E consolidated banking operations ABV.
The valuations have seen significant beating over past few weeks and have come at quite
attractive level now. We upgrade the stock to ACCUMULATE. We have not included the
impact of rights issue in our numbers which can add another Rs133/share to ABV implying
an upside of 7% to our target price.