SBI- State Bank of India -Washout quarter .:Macquarie Research

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State Bank of India
Washout quarter
Event
 All around poor showing. SBI reported 4Q11 standalone PAT of Rs0.2bn vs
our expectation of Rs28bn and consensus expectations of ~Rs30bn. The
negative surprise was due to three sharply lower NIMs, higher delinquencies
and a large pension-related hit on net worth.
 Maintain Neutral. From a full year perspective, we think FY12 profit growth is
likely to be healthy. However, near-term pressures remain on margins and
credit costs. Maintain Neutral while lowering TP from Rs2,750 to Rs2,450.
Impact
 Pension wipes out year’s profit, but FY12 to benefit from gratuity base
effect. The bank has taken a large one-time hit, through its reserves, due to
pension provisions as a result of wages being revised higher. The amount
Rs79bn is nearly equal to the bank’s FY11 profits. SBI also took Rs25bn of
pension provisioning through its P&L, and management indicated the
provisioning would be at similar levels in the future. However, we believe the
base impact of one-time gratuity provisions of Rs15bn in FY11 could boost
FY12 profit growth.
 Credit costs likely to remain high in FY12 as well. The bank reported
Rs56bn of fresh slippages in 4Q11 at 3.1% of the loan book, up from
Rs31.5bn in 3Q11. There may be a one-time cleaning up of books by the new
CMD as well as an impact of automation of NPL recognition. However, we
think credit costs are likely to remain high in FY12 due to higher provisioning
requirements on the existing stock of NPLs and restructured assets.
Management also indicated continued stress on the agri portfolio.
 NIM pressure likely to persist in 1Q12, ease somewhat from then on.
NIMs declined by 48bp QoQ. A key driver was higher deposit costs, which
were up 30bp QoQ. However, a negative surprise was a 20bp decline in asset
yields, which we think might have partially been due to higher delinquencies.
Management increased lending rates by 75bp recently, and we expect the full
impact to be felt in 2Q FY12.
Earnings and target price revision
 We reduce our consolidated FY12E and FY13E EPS by 7% and 4%,
respectively. We also deduct Rs72bn from FY11 net worth. We cut our TP
from Rs2,750 to Rs2,450 due to a reduction in FY12E BVPS.
Price catalyst
 12-month price target: Rs2,450.00 based on a Sum of parts methodology.
 Catalyst: Reduction in delinquencies in 2H FY12E.
Action and recommendation
 Maintain Neutral. The new CMD has taken some proactive steps like raising
loan interest rates, doing away with ‘teaser’ rate loans and providing more for
pensions. However, near-term concerns about margins and credit quality
remain.