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India Equity Research Reports, IPO and Stock News
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State Bank of India (SBIN)
Banks/Financial Institutions
Big clean-up act. SBI reported sharply lower earnings for the quarter, but addressed
most of its pending issues. Full impact of pension was taken through reserves/P&L, a
majority of gratuity is provided for and slippages have been aggressively reported in
SME/agri, on account of the move to system recognition. Higher slippages and
somewhat lower margins in 4Q were key disappointments. The new management
guides for better margins (has aggressively raised lending rates recently) and lower
slippages. The earnings profile will remain strong in FY2012E and FY2013E. Valuations
at 1.2X FY2013E book and 7X (adjusted) EPS are comforting but expect subdued price
performance in the near term. Maintain BUY with TP of `3,100 (`3,400 earlier).
Operation clean-up resulting in sharp decline in profitability; expect strong recovery in FY2012E
SBI reported poor earnings as the focus of the new management was to solve all critical issues
facing the bank—(1) the bank took a charge of `79.3 bn through reserves and `8.8 bn through
P&L during the current quarter for pensions on revised salary costs, (2) `5 bn of standard asset
provisions for teaser loans, (3) `2.5 bn impact on revised costs on provident fund (increase of 1%
to 9.5% for FY2011) resulting in margin decline, (4) higher slippages of 3.1% (annualized),
resulting in higher loan-loss provisions and de-recognition of interest income, and (5) tax rate is
abnormally high as the benefit of provisions do not have the benefit of tax deductions.
On the back of higher charges taken in the current year, we expect a strong earnings growth
trajectory for the bank in FY2012E and we build over 38% CAGR in FY2012-13E. We have revised
our estimates marginally, by about 2-5% in FY2012-13E, as we don’t see any further large oneoffs
barring provisions on restructured loans. However, as the bank has taken the pension hit
through reserves, our standalone BV is lower by 12% in FY2012E. Valuations at 1.2X FY2013E
consolidated book remain attractive. BUY with a TP of `3,100 (`3,400 earlier).
Margins decline on rising deposits costs and decline in loan yields
Margins for the quarter declined sharply to 3.1% from 3.6% in the previous quarter as costs
increased while lending yields declined. Cost of deposits increased to 5.3% from 5.2% while
lending yields (KS-calc) declined 17 bps, as we believe slippages in the current quarter resulted in
higher de-recognition of interest income. Also, there is an impact of `2.5 bn on interest expense
(about 15 bps on margins) due to revised interest rates on provident funds (fully provided in the
current quarter) while interest on income from tax refunds was lower during the quarter (about 15
bps). Franchise strength is playing out well for the bank as mobilization of CASA deposits
continues to remain impressive in a rising interest rate environment. CASA ratio improved 50 bps
qoq to 49%. CD ratio for the quarter was flat at 83% (domestic CD ratio at 76% compared to
77% in December 2010).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
State Bank of India (SBIN)
Banks/Financial Institutions
Big clean-up act. SBI reported sharply lower earnings for the quarter, but addressed
most of its pending issues. Full impact of pension was taken through reserves/P&L, a
majority of gratuity is provided for and slippages have been aggressively reported in
SME/agri, on account of the move to system recognition. Higher slippages and
somewhat lower margins in 4Q were key disappointments. The new management
guides for better margins (has aggressively raised lending rates recently) and lower
slippages. The earnings profile will remain strong in FY2012E and FY2013E. Valuations
at 1.2X FY2013E book and 7X (adjusted) EPS are comforting but expect subdued price
performance in the near term. Maintain BUY with TP of `3,100 (`3,400 earlier).
Operation clean-up resulting in sharp decline in profitability; expect strong recovery in FY2012E
SBI reported poor earnings as the focus of the new management was to solve all critical issues
facing the bank—(1) the bank took a charge of `79.3 bn through reserves and `8.8 bn through
P&L during the current quarter for pensions on revised salary costs, (2) `5 bn of standard asset
provisions for teaser loans, (3) `2.5 bn impact on revised costs on provident fund (increase of 1%
to 9.5% for FY2011) resulting in margin decline, (4) higher slippages of 3.1% (annualized),
resulting in higher loan-loss provisions and de-recognition of interest income, and (5) tax rate is
abnormally high as the benefit of provisions do not have the benefit of tax deductions.
On the back of higher charges taken in the current year, we expect a strong earnings growth
trajectory for the bank in FY2012E and we build over 38% CAGR in FY2012-13E. We have revised
our estimates marginally, by about 2-5% in FY2012-13E, as we don’t see any further large oneoffs
barring provisions on restructured loans. However, as the bank has taken the pension hit
through reserves, our standalone BV is lower by 12% in FY2012E. Valuations at 1.2X FY2013E
consolidated book remain attractive. BUY with a TP of `3,100 (`3,400 earlier).
Margins decline on rising deposits costs and decline in loan yields
Margins for the quarter declined sharply to 3.1% from 3.6% in the previous quarter as costs
increased while lending yields declined. Cost of deposits increased to 5.3% from 5.2% while
lending yields (KS-calc) declined 17 bps, as we believe slippages in the current quarter resulted in
higher de-recognition of interest income. Also, there is an impact of `2.5 bn on interest expense
(about 15 bps on margins) due to revised interest rates on provident funds (fully provided in the
current quarter) while interest on income from tax refunds was lower during the quarter (about 15
bps). Franchise strength is playing out well for the bank as mobilization of CASA deposits
continues to remain impressive in a rising interest rate environment. CASA ratio improved 50 bps
qoq to 49%. CD ratio for the quarter was flat at 83% (domestic CD ratio at 76% compared to
77% in December 2010).
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