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State Bank of India
Key highlights of 3QFY11 and what can be expected for the rest of FY11
Loan book grew by 6.7% q-q and 21.3% y-y in 3QFY11, with contributions coming
from auto loans (53% y-y), mortgages (23% y-y), corporate loans (25% y-y) and
rural loans (19% y-y). This loan growth was backed by deposit growth of 14% y-y –
CASA deposits grew 22% y-y and term deposits 7% y-y. CASA ratio increased to
49.5% from 48.8% in 2QFY11.
NIM expanded to 3.6% in 3QFY11 from 3.4% in 2QFY11, on the back of a flat cost
of funds of 5.2%, an expansion in blended loan yield of 10bp to 9.6% and an
expanding LDR (which increased from 80% in 2QFY11 to 83% in 3QFY11). Net
interest income grew by a handsome 11.5% q-q and 43% y-y on the back of this
NIM expansion. Non-interest income was flat y-y (down 17% q-q).
Gross non performing loan (GNPL) ratios were largely flat sequentially, increasing
1% q-q – GNPL ratio closed at 3.2%. Net non performing loan (NNPL) ratio closed
at 1.6% on the back of a core provision cover of 50% (64% including technical
write-offs). Loan-loss provisions for 3Q11 at INR16.32b were in line with our
estimates – 95bp of average loans.
What the bank needs to achieve in 4QFY11 to meet our expectations
Net loans of INR333b will have to be disbursed in 4QFY11 to meet our loan growth
expectation of 20.3% for FY11. We are factoring in 30bp q-q decline in NIMs to 3.3%
level in 4QFY11, compared to management guidance of a marginal expansion in
4QFY11. We need to bear in mind the higher incidence of priority sector loans in 4Q
(which should drag loan yields down) and a further pass-through of higher funding
costs. We are factoring in LLPs of 96bp for 4QFY11, similar to 3QFY11.
What to expect in FY12
We are budgeting for loan growth of 20.1%, NIM of 3.25%, core fee income growth of
25% – leading to an EPS growth of 23%. We are factoring in a rights issue worth
INR100b in Q1FY12 –management did not indicate a specific timeline for this. Our loanloss
provisions stay in the range of 95-100bp for FY12. We are factoring in a costincome
ratio of 45% for FY12.
Valuation: Our TP for SBI is INR3,000.00 (revised from INR3,350.00) to reflect the
earnings revision. Our TP is based on a three-stage residual income model, which
assumes a risk free rate of 8.3%, equity risk premium of 6%, terminal growth rate of 4%
and beta of 1.2. At our TP, the stock would trade at a FY12E P/BV of 1.8x (earlier 2x).
SBI is trading at 1.5x our FY12E adjusted book value for adjusted ROE of 17.6%. Risks
to TP: higher-than-expected NIM compression and LLPs
Time to add
Upgrade to BUY - system illiquidity should ease in the near term
Recall our sector downgrade in October 2010 on tight liquidity
Valuation looks attractive despite NIM squeeze & increase in LLP
Trades at 1.5x FY12E adjusted BV for adjusted ROE of 17.6%
Why the upgrade now
We see our earlier concern – lack of
liquidity in the system – correcting itself
gradually (recall our downgrade of the
sector; see our note “Time to book profit”
dated 8 October 2010). Deposit growth
has been inching up on higher rates and
government spending will slowly recycle
government surplus back into the system.
We believe SBI’s current valuations
largely, if not fully, price in the expected
margin contraction and possible sectorspecific
spike in credit cost.
What has changed in the sector
and FY12 outlook
We downgraded SBI in October on concerns about a widening gap
between credit growth and deposit growth and, consequently, tight
liquidity in the system driving up funding costs. We have seen this thesis
play out so far, with the loan-to-deposit ratio (LDR) looking very stretched
for all major banks (see Exhibit 3 for SBI’s historical and incremental
LDR). Deposit rates have increased by 200-300bp across the sector and
deposit growth has inched up from 14% levels in October 2010 to 16.4%
in early January 2011. This deposit traction, together with the expected
increase in government spending over the next 2-3 months, should
further ease the liquidity pressure in the system. In this context, we are
building in NIM contraction for FY12 and an increase in loan-loss
provision (LLP) to account for the possible credit-cost spike. We upgrade
to BUY (from Hold), as we find valuations attractive. We estimate SBI will
have to disburse loans worth INR334b (or 4.6% q-q growth) in 4QFY11 to
meet our loan growth estimate of 21% for FY11. We are factoring in NIM
compression of 30bp over the next 2-3 quarters, from the 3QFY11 level
of 3.6%, on account of a higher proportion of low yielding priority sector
loans in 4Q and a further pass-through of higher funding costs. We
assume LLP of 104bp for FY11, vs 88bp in FY10. For FY12, we estimate
loan growth of 21%, NIM of 3.3% and LLP of 97bp. We are factoring in a
rights issue of INR100b in 1QFY12, although management has not
indicated a specific timeline for this.
Valuation
We cut our target price for SBI to INR3,000.00 (from INR3,350.00) to
reflect the earnings revisions. Our TP is based on a three-stage residual
income model, which assumes a risk free rate of 8.3%, equity risk
premium of 6%, terminal growth rate of 4% and beta of 1.2. At our target,
the stock would trade at a FY12E P/BV of 1.8x (earlier 2x). SBI is trading
at 1.5x our FY12E adjusted book value for adjusted ROE of 17.6%. Risks
to TP: higher-than-expected NIM compression and LLP.
The Risk Experts
• Our starting point for this page is recognition of the macro
factors that can have a significant impact on stock-price
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
State Bank of India
Key highlights of 3QFY11 and what can be expected for the rest of FY11
Loan book grew by 6.7% q-q and 21.3% y-y in 3QFY11, with contributions coming
from auto loans (53% y-y), mortgages (23% y-y), corporate loans (25% y-y) and
rural loans (19% y-y). This loan growth was backed by deposit growth of 14% y-y –
CASA deposits grew 22% y-y and term deposits 7% y-y. CASA ratio increased to
49.5% from 48.8% in 2QFY11.
NIM expanded to 3.6% in 3QFY11 from 3.4% in 2QFY11, on the back of a flat cost
of funds of 5.2%, an expansion in blended loan yield of 10bp to 9.6% and an
expanding LDR (which increased from 80% in 2QFY11 to 83% in 3QFY11). Net
interest income grew by a handsome 11.5% q-q and 43% y-y on the back of this
NIM expansion. Non-interest income was flat y-y (down 17% q-q).
Gross non performing loan (GNPL) ratios were largely flat sequentially, increasing
1% q-q – GNPL ratio closed at 3.2%. Net non performing loan (NNPL) ratio closed
at 1.6% on the back of a core provision cover of 50% (64% including technical
write-offs). Loan-loss provisions for 3Q11 at INR16.32b were in line with our
estimates – 95bp of average loans.
What the bank needs to achieve in 4QFY11 to meet our expectations
Net loans of INR333b will have to be disbursed in 4QFY11 to meet our loan growth
expectation of 20.3% for FY11. We are factoring in 30bp q-q decline in NIMs to 3.3%
level in 4QFY11, compared to management guidance of a marginal expansion in
4QFY11. We need to bear in mind the higher incidence of priority sector loans in 4Q
(which should drag loan yields down) and a further pass-through of higher funding
costs. We are factoring in LLPs of 96bp for 4QFY11, similar to 3QFY11.
What to expect in FY12
We are budgeting for loan growth of 20.1%, NIM of 3.25%, core fee income growth of
25% – leading to an EPS growth of 23%. We are factoring in a rights issue worth
INR100b in Q1FY12 –management did not indicate a specific timeline for this. Our loanloss
provisions stay in the range of 95-100bp for FY12. We are factoring in a costincome
ratio of 45% for FY12.
Valuation: Our TP for SBI is INR3,000.00 (revised from INR3,350.00) to reflect the
earnings revision. Our TP is based on a three-stage residual income model, which
assumes a risk free rate of 8.3%, equity risk premium of 6%, terminal growth rate of 4%
and beta of 1.2. At our TP, the stock would trade at a FY12E P/BV of 1.8x (earlier 2x).
SBI is trading at 1.5x our FY12E adjusted book value for adjusted ROE of 17.6%. Risks
to TP: higher-than-expected NIM compression and LLPs
Time to add
Upgrade to BUY - system illiquidity should ease in the near term
Recall our sector downgrade in October 2010 on tight liquidity
Valuation looks attractive despite NIM squeeze & increase in LLP
Trades at 1.5x FY12E adjusted BV for adjusted ROE of 17.6%
Why the upgrade now
We see our earlier concern – lack of
liquidity in the system – correcting itself
gradually (recall our downgrade of the
sector; see our note “Time to book profit”
dated 8 October 2010). Deposit growth
has been inching up on higher rates and
government spending will slowly recycle
government surplus back into the system.
We believe SBI’s current valuations
largely, if not fully, price in the expected
margin contraction and possible sectorspecific
spike in credit cost.
What has changed in the sector
and FY12 outlook
We downgraded SBI in October on concerns about a widening gap
between credit growth and deposit growth and, consequently, tight
liquidity in the system driving up funding costs. We have seen this thesis
play out so far, with the loan-to-deposit ratio (LDR) looking very stretched
for all major banks (see Exhibit 3 for SBI’s historical and incremental
LDR). Deposit rates have increased by 200-300bp across the sector and
deposit growth has inched up from 14% levels in October 2010 to 16.4%
in early January 2011. This deposit traction, together with the expected
increase in government spending over the next 2-3 months, should
further ease the liquidity pressure in the system. In this context, we are
building in NIM contraction for FY12 and an increase in loan-loss
provision (LLP) to account for the possible credit-cost spike. We upgrade
to BUY (from Hold), as we find valuations attractive. We estimate SBI will
have to disburse loans worth INR334b (or 4.6% q-q growth) in 4QFY11 to
meet our loan growth estimate of 21% for FY11. We are factoring in NIM
compression of 30bp over the next 2-3 quarters, from the 3QFY11 level
of 3.6%, on account of a higher proportion of low yielding priority sector
loans in 4Q and a further pass-through of higher funding costs. We
assume LLP of 104bp for FY11, vs 88bp in FY10. For FY12, we estimate
loan growth of 21%, NIM of 3.3% and LLP of 97bp. We are factoring in a
rights issue of INR100b in 1QFY12, although management has not
indicated a specific timeline for this.
Valuation
We cut our target price for SBI to INR3,000.00 (from INR3,350.00) to
reflect the earnings revisions. Our TP is based on a three-stage residual
income model, which assumes a risk free rate of 8.3%, equity risk
premium of 6%, terminal growth rate of 4% and beta of 1.2. At our target,
the stock would trade at a FY12E P/BV of 1.8x (earlier 2x). SBI is trading
at 1.5x our FY12E adjusted book value for adjusted ROE of 17.6%. Risks
to TP: higher-than-expected NIM compression and LLP.
The Risk Experts
• Our starting point for this page is recognition of the macro
factors that can have a significant impact on stock-price
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
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