Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Dominance and improving parameters - key strength
Strengthening return ratios to drive valuations
Strong liability franchises of over 13,000 owned branches (standalone), and more than
17,000 branches (group), are a key strength for State Bank of India (SBI). SBI's increasing
integration with associate banks will further strengthen its dominant position in the
banking sector. The power of its liability franchises can be seen in its strong, improving
CASA ratio of ~48% (v/s 42% in FY09) and one of the highest shares of fee income-toaverage
assets (~1% v/s peers of 0.8%). We expect SBI to report net profit of CAGR of 21%
over FY11-13.
Strong CASA base a boon in a rising interest rate scenario: SBI's branch expansion,
technological advancement and marketing efforts have led to CASA CAGR of 20%
over FY06-11. Strong, sustainable and growing CASA base is the key strengths of SBI
and is likely to provide a cushion to NIMs in a rising interest rate scenario. Nevertheless,
a sharp increase in term deposit rates will lead to moderation in margins from 3.6%,
reported in 3QFY11. While we expect blended margins to improve 70bp in FY11, it is
likely to decline by ~10bp in FY12 (on a higher base). We factor in flat margins in
FY13 over FY12.
Operating leverage to boost RoE: Growth in operating expenses in FY09 and FY10
should be viewed in the context of capacity addition for the next growth phase. We
believe large investments in CBS/technology, staff additions and branch/ATM
expansions have already been made and the benefits of the investments will be realized
in FY12 and FY13, driving strong and profitable growth. While pension-related
provisions for the ninth bipartite agreement will kick in, a higher base due to gratuityrelated
provisions in FY11 will keep opex growth in check. We expect opex growth of
~13% v/s overall income growth of ~16% over FY11-13.
Fall in credit cost to drive earnings growth: Over the past two quarters, asset
quality has shown signs of stability after higher slippages in FY09 and FY10. Higher
slippages and excess provisioning to reach 70% of NPL coverage ratio have kept
credit costs high. We expect slippages to decline and upgrades and recoveries to
increase in FY12 and FY13, lowering credit costs. SBI is likely to reach 70% PCR by
1HFY12, which will provide a fillip to profitability. We factor in credit costs of 0.9% for
FY12 and FY13 as against 1.1% in FY11 and an average of 0.5% over FY05-10.
Return ratios to be strong, pension-related cost a concern: Strong fee and loan
growth, fall in credit costs and operating leverage will keep return ratios strong. We
expect RoA to improve from 0.9% in FY10 to ~1.1% in FY12 and FY13. RoE is likely
to improve from ~15% in FY10 to 18% by FY13 (without assuming capital raising).
The key risks include higher pension liabilities, further monetary tightening and any
risk to industrial growth at the macro level, which can impact potential loan growth in
FY12. SBI is our top pick in the sector with a target price of Rs3,550 (1.8x FY13E
consolidated BV + Rs127 for insurance).
3QFY11 highlights
State Bank of India
Key positives
Margins improved 18bp sequentially and 79bp YoYto
3.61%, led by a sequential drop in cost of
deposits(13bp). Improved CASA ratio (~90bp QoQ)
and CDratio of 77% also aided margin improvement.
Slippages for the quarter were Rs39b (including
Rs7.7b of URIPY balance reduction). Annualized
slippage ratio for the quarter was 2.5% v/s 2.6%
(core in 1HFY11). The management guided for
improvement in slippages and reduction in GNPA
ratio in 4QFY11. The encouraging trend in asset
quality increases our confidence of a fall in credit
costs in FY12.
Key negatives
SBI's second pension liability provisions are without
considering the ninth bipartite agreement and
provided as per the eighth bipartite agreement. The
management is waiting for actuarial valuations and
plans to amortize the liability over five years.
Other highlights
SBI has not yet made its 2% standard provision on
a teaser loan portfolio, pending clarification from the
RBI. The bank has provided at 0.4% and if the RBI
does not agree, it will have to make an additional
provision of Rs5b.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Dominance and improving parameters - key strength
Strengthening return ratios to drive valuations
Strong liability franchises of over 13,000 owned branches (standalone), and more than
17,000 branches (group), are a key strength for State Bank of India (SBI). SBI's increasing
integration with associate banks will further strengthen its dominant position in the
banking sector. The power of its liability franchises can be seen in its strong, improving
CASA ratio of ~48% (v/s 42% in FY09) and one of the highest shares of fee income-toaverage
assets (~1% v/s peers of 0.8%). We expect SBI to report net profit of CAGR of 21%
over FY11-13.
Strong CASA base a boon in a rising interest rate scenario: SBI's branch expansion,
technological advancement and marketing efforts have led to CASA CAGR of 20%
over FY06-11. Strong, sustainable and growing CASA base is the key strengths of SBI
and is likely to provide a cushion to NIMs in a rising interest rate scenario. Nevertheless,
a sharp increase in term deposit rates will lead to moderation in margins from 3.6%,
reported in 3QFY11. While we expect blended margins to improve 70bp in FY11, it is
likely to decline by ~10bp in FY12 (on a higher base). We factor in flat margins in
FY13 over FY12.
Operating leverage to boost RoE: Growth in operating expenses in FY09 and FY10
should be viewed in the context of capacity addition for the next growth phase. We
believe large investments in CBS/technology, staff additions and branch/ATM
expansions have already been made and the benefits of the investments will be realized
in FY12 and FY13, driving strong and profitable growth. While pension-related
provisions for the ninth bipartite agreement will kick in, a higher base due to gratuityrelated
provisions in FY11 will keep opex growth in check. We expect opex growth of
~13% v/s overall income growth of ~16% over FY11-13.
Fall in credit cost to drive earnings growth: Over the past two quarters, asset
quality has shown signs of stability after higher slippages in FY09 and FY10. Higher
slippages and excess provisioning to reach 70% of NPL coverage ratio have kept
credit costs high. We expect slippages to decline and upgrades and recoveries to
increase in FY12 and FY13, lowering credit costs. SBI is likely to reach 70% PCR by
1HFY12, which will provide a fillip to profitability. We factor in credit costs of 0.9% for
FY12 and FY13 as against 1.1% in FY11 and an average of 0.5% over FY05-10.
Return ratios to be strong, pension-related cost a concern: Strong fee and loan
growth, fall in credit costs and operating leverage will keep return ratios strong. We
expect RoA to improve from 0.9% in FY10 to ~1.1% in FY12 and FY13. RoE is likely
to improve from ~15% in FY10 to 18% by FY13 (without assuming capital raising).
The key risks include higher pension liabilities, further monetary tightening and any
risk to industrial growth at the macro level, which can impact potential loan growth in
FY12. SBI is our top pick in the sector with a target price of Rs3,550 (1.8x FY13E
consolidated BV + Rs127 for insurance).
3QFY11 highlights
State Bank of India
Key positives
Margins improved 18bp sequentially and 79bp YoYto
3.61%, led by a sequential drop in cost of
deposits(13bp). Improved CASA ratio (~90bp QoQ)
and CDratio of 77% also aided margin improvement.
Slippages for the quarter were Rs39b (including
Rs7.7b of URIPY balance reduction). Annualized
slippage ratio for the quarter was 2.5% v/s 2.6%
(core in 1HFY11). The management guided for
improvement in slippages and reduction in GNPA
ratio in 4QFY11. The encouraging trend in asset
quality increases our confidence of a fall in credit
costs in FY12.
Key negatives
SBI's second pension liability provisions are without
considering the ninth bipartite agreement and
provided as per the eighth bipartite agreement. The
management is waiting for actuarial valuations and
plans to amortize the liability over five years.
Other highlights
SBI has not yet made its 2% standard provision on
a teaser loan portfolio, pending clarification from the
RBI. The bank has provided at 0.4% and if the RBI
does not agree, it will have to make an additional
provision of Rs5b.
No comments:
Post a Comment