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State Bank of India Neutral
SBI.BO, SBIN IN
Cautious optimism from management
• We met with the management at SBI including their head of Project
finance. Management is optimistic of strong PPOP performance in FY12
but high NPA and pension provision could impact PAT growth. We
maintain Neutral as we see risk-reward unfavorable.
• Loan growth to remain robust: SBI expects loan growth of 21-22% in
FY12. Strong momentum in infra loan growth is expected to continue
given high undisbursed sanctions over last 2 yrs, but growth in new
sanctions is expected to slow down. Retail credit, including mortgages;
continue to remain strong with non metro cities propelling mortgage
growth and high car demand. Corporate capex though has not picked up
with management expecting improvement in 2HFY11. Overall, we see
risks to management guidance on loan growth as we expect economic
growth to moderate. (Detailed takeaways on infra growth and asset
quality on page 3, 4).
• Margin pressure back ended : Lending rate increase would help offset
higher funding costs in 4Q11 but lagged term deposit increase would
impact margins post June qtr. Repricing of high cost 1000-day deposits
(Rs500bn) and teaser loans (Rs300bn) would provide some offset.
Overall we expect margin contraction of ~15-20bps in FY12.
• Asset quality improving, provisions to remain high: Management is
seeing improving asset quality trend with lower gross delinquencies
expected. But we expect NPA provisions to remain high due to
provisioning required to increase coverage and possibility of
provisioning to be made of teaser loan portfolio.
• Maintain Neutral: We continue with our Neutral stance on SBI and
believe that valuations at par with PNB/BOB are not justified with lower
ROEs. Operating performance would be strong but this is contingent
upon strong asset quality improvement. Also higher NPA and pension
provision would impact profit growth. PNB remains our top pick in the
PSU space with valuations at par and high return ratios.
Takeaways from our meeting with the Head of Project
finance
Infra loan growth to remain robust
SBI's infra loan book has been strong over the last 2 yrs and management expects
strong growth to continue. Recent issues with IPPs like coal shortage, low merchant
rates and slow government clearances would impact incremental sanctions but
undisbursed sanctions over last 2-3 yrs will keep loan growth robust at 30-40% over
the next 2 years. With front loading of equity contribution and with larger proportion
of project capex incurred in the later part of the project (~70% of project cost in last
2yrs), sanctions over last 2-3 yrs would keep loan growth high over FY11-13.
Asset Quality - Medium term risks remain
For IPPs: SBI believes that some banks have been very aggressive in lending to
power projects with equity proportion <10% and there could be some risks for the
system from these IPP exposures. SBI does not see large risks to their power
portfolio as they have maintained prudent debt-equity limits and tested project
profitability with very harsh sensitivities, but higher than expected coal shortages
could be a very large risk.
For their SEB exposures SBI does not see any near term risks but believes that the
long term solution lies in reforms. Currently SEB debt is secured through escrows
and they are currently now seeing any stress in that book.
Aggressive lending in the roads space normalizing:
SBI had just started funding roads again post a gap of 12-18 mnts. Competition in the
space had intensified and with unfavorable risk reward and thus management had
slowed disbursements significantly. With pricing improving now with tighter
liquidity, SBI has accelerated sanctions in the roads space.
Telecom funding to new 2G licensees:
SBI does have exposure to some of the 2G licensees but believes there is limited risk
to the portfolio. SBI believes that most funding for 2G licensees was not only based
on value of the licences and expectation of a successful rollout but
operations/strength of JV partners was also considered in funding the licences. Given
the recent newsflow on the sector, we believe that the government will not give back
the license fees paid by telecom companies for acquiring licensees and that could put
exposure to new 2G licensees at risk.
Table 1: Telecom exposure for banks (% of loan book)
% of Loan book
Axis Bank 7.2%
ICICI Bank N/A
BOI 4.1%
PNB 3.4%
HDFC Bank 2.5%
SBI 2.3%
IndusInd Bank 1.1%
Kotak <1%
Source: Company, J.P.Morgan
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
State Bank of India Neutral
SBI.BO, SBIN IN
Cautious optimism from management
• We met with the management at SBI including their head of Project
finance. Management is optimistic of strong PPOP performance in FY12
but high NPA and pension provision could impact PAT growth. We
maintain Neutral as we see risk-reward unfavorable.
• Loan growth to remain robust: SBI expects loan growth of 21-22% in
FY12. Strong momentum in infra loan growth is expected to continue
given high undisbursed sanctions over last 2 yrs, but growth in new
sanctions is expected to slow down. Retail credit, including mortgages;
continue to remain strong with non metro cities propelling mortgage
growth and high car demand. Corporate capex though has not picked up
with management expecting improvement in 2HFY11. Overall, we see
risks to management guidance on loan growth as we expect economic
growth to moderate. (Detailed takeaways on infra growth and asset
quality on page 3, 4).
• Margin pressure back ended : Lending rate increase would help offset
higher funding costs in 4Q11 but lagged term deposit increase would
impact margins post June qtr. Repricing of high cost 1000-day deposits
(Rs500bn) and teaser loans (Rs300bn) would provide some offset.
Overall we expect margin contraction of ~15-20bps in FY12.
• Asset quality improving, provisions to remain high: Management is
seeing improving asset quality trend with lower gross delinquencies
expected. But we expect NPA provisions to remain high due to
provisioning required to increase coverage and possibility of
provisioning to be made of teaser loan portfolio.
• Maintain Neutral: We continue with our Neutral stance on SBI and
believe that valuations at par with PNB/BOB are not justified with lower
ROEs. Operating performance would be strong but this is contingent
upon strong asset quality improvement. Also higher NPA and pension
provision would impact profit growth. PNB remains our top pick in the
PSU space with valuations at par and high return ratios.
Takeaways from our meeting with the Head of Project
finance
Infra loan growth to remain robust
SBI's infra loan book has been strong over the last 2 yrs and management expects
strong growth to continue. Recent issues with IPPs like coal shortage, low merchant
rates and slow government clearances would impact incremental sanctions but
undisbursed sanctions over last 2-3 yrs will keep loan growth robust at 30-40% over
the next 2 years. With front loading of equity contribution and with larger proportion
of project capex incurred in the later part of the project (~70% of project cost in last
2yrs), sanctions over last 2-3 yrs would keep loan growth high over FY11-13.
Asset Quality - Medium term risks remain
For IPPs: SBI believes that some banks have been very aggressive in lending to
power projects with equity proportion <10% and there could be some risks for the
system from these IPP exposures. SBI does not see large risks to their power
portfolio as they have maintained prudent debt-equity limits and tested project
profitability with very harsh sensitivities, but higher than expected coal shortages
could be a very large risk.
For their SEB exposures SBI does not see any near term risks but believes that the
long term solution lies in reforms. Currently SEB debt is secured through escrows
and they are currently now seeing any stress in that book.
Aggressive lending in the roads space normalizing:
SBI had just started funding roads again post a gap of 12-18 mnts. Competition in the
space had intensified and with unfavorable risk reward and thus management had
slowed disbursements significantly. With pricing improving now with tighter
liquidity, SBI has accelerated sanctions in the roads space.
Telecom funding to new 2G licensees:
SBI does have exposure to some of the 2G licensees but believes there is limited risk
to the portfolio. SBI believes that most funding for 2G licensees was not only based
on value of the licences and expectation of a successful rollout but
operations/strength of JV partners was also considered in funding the licences. Given
the recent newsflow on the sector, we believe that the government will not give back
the license fees paid by telecom companies for acquiring licensees and that could put
exposure to new 2G licensees at risk.
Table 1: Telecom exposure for banks (% of loan book)
% of Loan book
Axis Bank 7.2%
ICICI Bank N/A
BOI 4.1%
PNB 3.4%
HDFC Bank 2.5%
SBI 2.3%
IndusInd Bank 1.1%
Kotak <1%
Source: Company, J.P.Morgan
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