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State Bank of India (SBI.BO)
4QFY11 Results: Disappointing Quarter, Operationally Weak
Weak quarter, 4Q11 profits down to Rs209mn — SBI's 4Q11 results were
disappointing with profits down 99%yoy at Rs209mn. Operationally too, the quarter
was weak and characterized by: a) sharp NIMs decline (down 54bps QoQ to 307bps);
b) modest fee income growth (7%YoY); and c) higher than expected asset quality
deterioration (NPLs up 8%QoQ, slippages high at over 3% and credit costs at 1.7%).
Increased employee benefit costs (pension, gratuity) further squeezed profits, and
added to the overall pain in the quarter.
There was an element of kitchen sinking as well — SBI's large and accelerated
recognition of employee benefits, tighter NPL recognition norms and swifter pace of
providing for it, does suggest some kitchen sinking. It was surprising, especially as the
new management is from within the bank (possibly under pressure from the regulator
as well). While much of this was overdue, given the existing gap in liability recognition,
the extent to which it was absorbed during the quarter came as a surprise.
Lack of transparency and consistency in accounting, disclosures — SBI's
pension provisioning was large, not disclosed/accounted for earlier (unlike other PSU
bank peers) and was relatively less obvious (not regulatory driven). We believe this
lack of clarity and provisioning is disappointing, has historical precedence (it had taken
a large Rs43bn charge in FY08 as well) and reflects the management's challenge in
getting a fix on its pension liability. While management suggests the gap is now fixed,
there was a case of deja vu.
Outlook: Operationally, reasonably healthy — We believe operationally the outlook
is reasonable: a) loan growth of 17-18% medium term; b) NIMs could pick up from here
on; management guides to 350bps NIM in FY12; c) cost efficiency should improve as
much of the pain has already been taken; and d) while there are still questions on asset
quality slippages, management suggests, will provide for it more aggressively than in
recent past. We believe there could still be some near-term pressures on the stock.
However, with much of the pain behind us, we would look to accumulate on further
weakness
State Bank of India
Company description
SBI is India's largest bank with around 18% market share in deposits and loans,
over 12,000 branches and more than 90m customers. Together with its seven
associate banks (ownership ranging from 75% to 100%), the SBI group has a 25%
market share in deposits and loans, and has over 14,000 branches. SBI has the
largest overseas presence among Indian banks, with 54 offices in 28 countries. The
Government of India owns 59.73% of the bank. SBI is a banker to most state
governments, and has a dominant share of government fee business. SBI has a
presence in other financial services through subsidiaries and joint ventures. It has a
joint venture with Cardiff for life insurance and also has a presence in asset
management, investment banking and primary dealership. The SBI group has more
than 21,000 ATMs spread, the largest in the country. The bank has more than 30m
cards outstanding, is networked across over 12,000 offices of the SBI group and is
aggressively expanding its technology based offering, across its existing network.
Investment strategy
We rate SBI Buy/Low Risk. SBI has aggressively restructured in terms of
manpower, technology and business focus. It should be a significant beneficiary of
the expected increase in loan demand in India, spread across the consumer sector
and in the industrial segment. SBI has also invested aggressively in its technology
platform, Financial Services ventures, its five subsidiary banks, and has
aggressively restructured itself to lead and participate in the strong economic and
business environment. We expect SBI to generate ROEs of 17-19%, as it leverages
its capital over the medium term.
Valuation
Our target price of Rs3,110 is based on our EVA model, in which we assume a riskfree rate of 8.0%, in line with the market level. Our longer-term loan loss assumption
is 100bps pa (in-line with industry). Our target price for SBI includes a subsidiary
valuation of Rs671: Life Insurance at Rs184 per share, associate banks at 1.25x
1Yr Fwd PBV (Rs391), value for SBI's Asset management business (Rs25, 5% of
assets) and incorporates capital markets subsidiary at Rs72 based on 10x 1Yr Fwd
PE. We also use a sum of parts valuation which values SBI at Rs3,029 per share. In
this valuation, we benchmark the consolidated banking business off a 1.6x 1Yr Fwd
P/BV (1.7x for the parent and 1.25x for associate banks) - a 10% premium to peers.
We also add Rs281 per share for its non-banking subsidiary businesses as detailed
earlier. We base our target price on EVA, as we believe it better adjusts for the
relatively dynamic cost of capital and better captures the long-term value of the
business.
Risks
We rate SBI as Low Risk, in line with CIRA's quantitative based risk rating system.
We believe this is appropriate given the nature of SBI's business, the quality of
management, and the direct government ownership. The downside risks that could
impede the stock from reaching our target price include: (1) A sharp rise in interest
rates; (2) Asset quality concerns given strong loan growth; (3) Lack of liquidity or
deposit growth; (4) Government involvement could be contrary to the interests of
minority shareholders; and (5) A lack of capital to support growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
State Bank of India (SBI.BO)
4QFY11 Results: Disappointing Quarter, Operationally Weak
Weak quarter, 4Q11 profits down to Rs209mn — SBI's 4Q11 results were
disappointing with profits down 99%yoy at Rs209mn. Operationally too, the quarter
was weak and characterized by: a) sharp NIMs decline (down 54bps QoQ to 307bps);
b) modest fee income growth (7%YoY); and c) higher than expected asset quality
deterioration (NPLs up 8%QoQ, slippages high at over 3% and credit costs at 1.7%).
Increased employee benefit costs (pension, gratuity) further squeezed profits, and
added to the overall pain in the quarter.
There was an element of kitchen sinking as well — SBI's large and accelerated
recognition of employee benefits, tighter NPL recognition norms and swifter pace of
providing for it, does suggest some kitchen sinking. It was surprising, especially as the
new management is from within the bank (possibly under pressure from the regulator
as well). While much of this was overdue, given the existing gap in liability recognition,
the extent to which it was absorbed during the quarter came as a surprise.
Lack of transparency and consistency in accounting, disclosures — SBI's
pension provisioning was large, not disclosed/accounted for earlier (unlike other PSU
bank peers) and was relatively less obvious (not regulatory driven). We believe this
lack of clarity and provisioning is disappointing, has historical precedence (it had taken
a large Rs43bn charge in FY08 as well) and reflects the management's challenge in
getting a fix on its pension liability. While management suggests the gap is now fixed,
there was a case of deja vu.
Outlook: Operationally, reasonably healthy — We believe operationally the outlook
is reasonable: a) loan growth of 17-18% medium term; b) NIMs could pick up from here
on; management guides to 350bps NIM in FY12; c) cost efficiency should improve as
much of the pain has already been taken; and d) while there are still questions on asset
quality slippages, management suggests, will provide for it more aggressively than in
recent past. We believe there could still be some near-term pressures on the stock.
However, with much of the pain behind us, we would look to accumulate on further
weakness
State Bank of India
Company description
SBI is India's largest bank with around 18% market share in deposits and loans,
over 12,000 branches and more than 90m customers. Together with its seven
associate banks (ownership ranging from 75% to 100%), the SBI group has a 25%
market share in deposits and loans, and has over 14,000 branches. SBI has the
largest overseas presence among Indian banks, with 54 offices in 28 countries. The
Government of India owns 59.73% of the bank. SBI is a banker to most state
governments, and has a dominant share of government fee business. SBI has a
presence in other financial services through subsidiaries and joint ventures. It has a
joint venture with Cardiff for life insurance and also has a presence in asset
management, investment banking and primary dealership. The SBI group has more
than 21,000 ATMs spread, the largest in the country. The bank has more than 30m
cards outstanding, is networked across over 12,000 offices of the SBI group and is
aggressively expanding its technology based offering, across its existing network.
Investment strategy
We rate SBI Buy/Low Risk. SBI has aggressively restructured in terms of
manpower, technology and business focus. It should be a significant beneficiary of
the expected increase in loan demand in India, spread across the consumer sector
and in the industrial segment. SBI has also invested aggressively in its technology
platform, Financial Services ventures, its five subsidiary banks, and has
aggressively restructured itself to lead and participate in the strong economic and
business environment. We expect SBI to generate ROEs of 17-19%, as it leverages
its capital over the medium term.
Valuation
Our target price of Rs3,110 is based on our EVA model, in which we assume a riskfree rate of 8.0%, in line with the market level. Our longer-term loan loss assumption
is 100bps pa (in-line with industry). Our target price for SBI includes a subsidiary
valuation of Rs671: Life Insurance at Rs184 per share, associate banks at 1.25x
1Yr Fwd PBV (Rs391), value for SBI's Asset management business (Rs25, 5% of
assets) and incorporates capital markets subsidiary at Rs72 based on 10x 1Yr Fwd
PE. We also use a sum of parts valuation which values SBI at Rs3,029 per share. In
this valuation, we benchmark the consolidated banking business off a 1.6x 1Yr Fwd
P/BV (1.7x for the parent and 1.25x for associate banks) - a 10% premium to peers.
We also add Rs281 per share for its non-banking subsidiary businesses as detailed
earlier. We base our target price on EVA, as we believe it better adjusts for the
relatively dynamic cost of capital and better captures the long-term value of the
business.
Risks
We rate SBI as Low Risk, in line with CIRA's quantitative based risk rating system.
We believe this is appropriate given the nature of SBI's business, the quality of
management, and the direct government ownership. The downside risks that could
impede the stock from reaching our target price include: (1) A sharp rise in interest
rates; (2) Asset quality concerns given strong loan growth; (3) Lack of liquidity or
deposit growth; (4) Government involvement could be contrary to the interests of
minority shareholders; and (5) A lack of capital to support growth.
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