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State Bank of India
Overweight
SBI.BO, SBIN IN
4Q11: multiple stress points
SBI reported near zero profits for 4Q12 (Rs200mn), a huge negative
surprise vs. our expectation of 16% qoq growth to PAT of Rs32.7bn.
This was compounded by Rs79.3bn direct charge to reserves on
pensions. Everything that could go wrong did – a hike in pensions,
margin pressure, and worsening delinquencies. Conservative accounting
compounded the problem, especially for taxes.
• Stress on multiple fronts: SBI showed stress on multiple fronts. A)
Margins fell~50bps qoq, partly from margin pressure but also due to an
unexplained qoq fall in loan yields (we think due to the large
delinquencies). B) Delinquencies accelerated from Rs40bn to Rs56bn,
partly due to bunching from system recognised NPLs. C) pensions got
benchmarked to the latest salary hikes, leading to a Rs117bn charge that
was spread over the P&L and the reserves.
• Turnaround likely in FY12E: We think SBI should improve the key
metrics in FY12E, with margins improving (though management
guidance of 3.5% is probably optimistic), delinquencies slowing as the
bunching effect wanes, and the pension hits are all taken. The effective
tax rate is likely to revert to normal; we are not capturing writebacks yet.
We note that SBI still needs an additional Rs25bn of provisions (in
1H12) to meet the new RBI norms.
• Revise earnings estimates and PT: We revise our earnings estimates
up 9-12% for FY12-13E mainly due to lower employee costs as Rs79bn
of pension liability was charged through reserves. This has impacted
book value by 13% but ROEs would look significantly improved at ~18-
19% in FY12-13E vs. 15-16%. Given the book impact, we cut our
Gordon growth-based Mar-12 PT to Rs3000/share (Rs3200/share
earlier).
• Maintain Overweight: We maintain our OW on SBI but continue to
prefer the private banks. SBI's likely turnaround in FY12 makes it
attractive, but significant challenges remain on controlling delinquencies.
Also with the current tier-1 ratio at ~7.8%, a rights issue looks inevitable.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
State Bank of India
Overweight
SBI.BO, SBIN IN
4Q11: multiple stress points
SBI reported near zero profits for 4Q12 (Rs200mn), a huge negative
surprise vs. our expectation of 16% qoq growth to PAT of Rs32.7bn.
This was compounded by Rs79.3bn direct charge to reserves on
pensions. Everything that could go wrong did – a hike in pensions,
margin pressure, and worsening delinquencies. Conservative accounting
compounded the problem, especially for taxes.
• Stress on multiple fronts: SBI showed stress on multiple fronts. A)
Margins fell~50bps qoq, partly from margin pressure but also due to an
unexplained qoq fall in loan yields (we think due to the large
delinquencies). B) Delinquencies accelerated from Rs40bn to Rs56bn,
partly due to bunching from system recognised NPLs. C) pensions got
benchmarked to the latest salary hikes, leading to a Rs117bn charge that
was spread over the P&L and the reserves.
• Turnaround likely in FY12E: We think SBI should improve the key
metrics in FY12E, with margins improving (though management
guidance of 3.5% is probably optimistic), delinquencies slowing as the
bunching effect wanes, and the pension hits are all taken. The effective
tax rate is likely to revert to normal; we are not capturing writebacks yet.
We note that SBI still needs an additional Rs25bn of provisions (in
1H12) to meet the new RBI norms.
• Revise earnings estimates and PT: We revise our earnings estimates
up 9-12% for FY12-13E mainly due to lower employee costs as Rs79bn
of pension liability was charged through reserves. This has impacted
book value by 13% but ROEs would look significantly improved at ~18-
19% in FY12-13E vs. 15-16%. Given the book impact, we cut our
Gordon growth-based Mar-12 PT to Rs3000/share (Rs3200/share
earlier).
• Maintain Overweight: We maintain our OW on SBI but continue to
prefer the private banks. SBI's likely turnaround in FY12 makes it
attractive, but significant challenges remain on controlling delinquencies.
Also with the current tier-1 ratio at ~7.8%, a rights issue looks inevitable.
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