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Higher provisions mar bottom‐line; margin decline higher‐than‐expected: State
Bank of India (SBI) reported net profit of just Rs209mn on account of lower
topline growth and higher provisioning requirement during the quarter. Net
Interest Income (NII) for the quarter grew by 19.9% YoY but declined by 11.0%
QoQ on account of a steep 54bps decline in the reported NIM at 3.07%.
However, adjusting for higher interest outgo of Rs2.5bn (due to hike in interest
rate on PF from 8.5% to 9.5% from current year and outgo for full year
accounted in Q4) during the quarter the margins could have been higher at
3.26%. Moreover, Q3FY11 net interest income included interest on IT refund of
Rs2.3bn, adjusting for which the sequential margin decline would have been
lower. Adjusting for this, NII growth for the quarter would have been at 23.6%
YoY. The decline in NIMs could be traced down to a 34bps QoQ in cost of
deposits due to higher interest on term deposits and a 24bps QoQ decline in
yield on advances (further clarity awaited on this) despite a 50bps PLR and
65bps base rate hike during the quarter. Staff costs increased by 20% QoQ on
account of Rs9.0bn provision towards pension and gratuity. Of the total pension
liability of Rs104.0bn, the bank provided for Rs24.7bn through P&L in FY11 and
set‐off Rs79.3bn against reserves. Loan loss provision increased by 100% QoQ
due to higher slippages during the quarter. Moreover the bank made Rs5.0bn
worth provisions towards standard assets on teaser loans as directed by the RBI.
In addition to this the effective tax rate for the quarter stood at 99% as most
provisions made during the quarter were non‐tax deductible in nature.
Slippages spike up; higher write‐offs restrict increase in gross NPAs: Gross
slippages during the quarter increased sharply to Rs56.5bn (3.6% annualized) v/s
Rs39.0bn in the last quarter (2.6% annualized – adjusted for unrealised interest
of previous years, which was been set off against gross slippages in Q3FY11) due
to migration to complete system‐based NPL recognition method (although
management did not quantify the same). However, write‐off of loans worth
Rs26.7bn v/s Rs14.3bn in Q3FY11 restricted the overall increase in GNPAs during
the quarter at just 8.1% QoQ. Provision cover including technical write offs
improved marginally to 64.95% v/s 64.07% in Q3FY11. SBI now needs to fulfil a
shortfall of Rs11.0bn to achieve 70% provision cover as on September 2010.
Valuations and Outlook: SBI reported a dismal set of numbers due to steep
provisioning requirements and higher than expected margin erosion. However,
we believe going forward the margin decline could likely get arrested on two
counts a) the bank has hiked its base rate by 100bps since April 2011 and b)
around Rs340bn worth high cost deposits bearing rate of ~10.5%‐10.7% raised in
2008 coming up for re‐pricing in Q2 of current fiscal. However, lower capital
adequacy and that acting as a constraint for growth going forward is a major
concern for the bank. With tier‐I capital ratio of lower than 8% for the largest
bank in the country could call for close monitoring by the RBI from a regulatory
perspective and hence we believe the rights issue is very critical at this juncture
for the bank. All these factors along with steep book value erosion and concerns
over asset quality and margins could act as an overhang on the stock in the near
term. We believe the stock could witness further 5‐7% downside from current
levels. However, this could be seen as an opportune time to enter the stock
from a medium to long term perspective. We have revised our earnings
estimates downwards by 8.1% and 4.2% For FY12 and FY13 respectively. We
maintain our ‘Accumulate’ rating on the stock with a revised 15‐month forward
price target of Rs2,726. We have factored in rights issue of Rs200bn at an issue
price of Rs1,920 per share. Excluding the proceeds from the rights issue our
target price on the stock would have been lower by ~Rs200‐250 per share.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Higher provisions mar bottom‐line; margin decline higher‐than‐expected: State
Bank of India (SBI) reported net profit of just Rs209mn on account of lower
topline growth and higher provisioning requirement during the quarter. Net
Interest Income (NII) for the quarter grew by 19.9% YoY but declined by 11.0%
QoQ on account of a steep 54bps decline in the reported NIM at 3.07%.
However, adjusting for higher interest outgo of Rs2.5bn (due to hike in interest
rate on PF from 8.5% to 9.5% from current year and outgo for full year
accounted in Q4) during the quarter the margins could have been higher at
3.26%. Moreover, Q3FY11 net interest income included interest on IT refund of
Rs2.3bn, adjusting for which the sequential margin decline would have been
lower. Adjusting for this, NII growth for the quarter would have been at 23.6%
YoY. The decline in NIMs could be traced down to a 34bps QoQ in cost of
deposits due to higher interest on term deposits and a 24bps QoQ decline in
yield on advances (further clarity awaited on this) despite a 50bps PLR and
65bps base rate hike during the quarter. Staff costs increased by 20% QoQ on
account of Rs9.0bn provision towards pension and gratuity. Of the total pension
liability of Rs104.0bn, the bank provided for Rs24.7bn through P&L in FY11 and
set‐off Rs79.3bn against reserves. Loan loss provision increased by 100% QoQ
due to higher slippages during the quarter. Moreover the bank made Rs5.0bn
worth provisions towards standard assets on teaser loans as directed by the RBI.
In addition to this the effective tax rate for the quarter stood at 99% as most
provisions made during the quarter were non‐tax deductible in nature.
Slippages spike up; higher write‐offs restrict increase in gross NPAs: Gross
slippages during the quarter increased sharply to Rs56.5bn (3.6% annualized) v/s
Rs39.0bn in the last quarter (2.6% annualized – adjusted for unrealised interest
of previous years, which was been set off against gross slippages in Q3FY11) due
to migration to complete system‐based NPL recognition method (although
management did not quantify the same). However, write‐off of loans worth
Rs26.7bn v/s Rs14.3bn in Q3FY11 restricted the overall increase in GNPAs during
the quarter at just 8.1% QoQ. Provision cover including technical write offs
improved marginally to 64.95% v/s 64.07% in Q3FY11. SBI now needs to fulfil a
shortfall of Rs11.0bn to achieve 70% provision cover as on September 2010.
Valuations and Outlook: SBI reported a dismal set of numbers due to steep
provisioning requirements and higher than expected margin erosion. However,
we believe going forward the margin decline could likely get arrested on two
counts a) the bank has hiked its base rate by 100bps since April 2011 and b)
around Rs340bn worth high cost deposits bearing rate of ~10.5%‐10.7% raised in
2008 coming up for re‐pricing in Q2 of current fiscal. However, lower capital
adequacy and that acting as a constraint for growth going forward is a major
concern for the bank. With tier‐I capital ratio of lower than 8% for the largest
bank in the country could call for close monitoring by the RBI from a regulatory
perspective and hence we believe the rights issue is very critical at this juncture
for the bank. All these factors along with steep book value erosion and concerns
over asset quality and margins could act as an overhang on the stock in the near
term. We believe the stock could witness further 5‐7% downside from current
levels. However, this could be seen as an opportune time to enter the stock
from a medium to long term perspective. We have revised our earnings
estimates downwards by 8.1% and 4.2% For FY12 and FY13 respectively. We
maintain our ‘Accumulate’ rating on the stock with a revised 15‐month forward
price target of Rs2,726. We have factored in rights issue of Rs200bn at an issue
price of Rs1,920 per share. Excluding the proceeds from the rights issue our
target price on the stock would have been lower by ~Rs200‐250 per share.
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