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State Bank of India
Lowering earnings and price target
We lower FY12E earnings by 5% as we build in higher
operating expenses and provisions following 4Q results.
Book value has suffered from the one-time adjustment
of Rs80bn (Rs125/sh) against reserves in FY11.
We downgrade our target multiple from 1.8x to 1.7x as
we build in higher sustainable employee expenses.
We lower price target to Rs2,650 (22% lower than our
earlier Rs3,380) and downgrade rating to IN-LINE.
Uncertainty on pension accounting and additional onetime loan provisions of Rs20bn in 1Q FY12E will weigh
on the stock price performance in the short term.
Prior period pension adjustment knocks off Rs80bn
from reserves. SBI announced a pension shortfall of
Rs110bn, which occurred on account of benchmarking
pensions to the ninth bipartite settlement from the eighth.
SBI’s pension provisioning methodology is different from
those of other state banks. Of the total shortfall of Rs110bn,
Rs24bn relates to the current year and has been provided
through the P/L. Rs80bn relating to prior years has been
deducted from shareholders’ funds and no deferred tax
asset has been created for the shortfall. Due to this
adjustment Tier I declined to 7.7% in 4Q FY11 from 9.6% in
Dec-09, triggering capital raising.
NII drops sharply. Reported net interest income declined
11% qoq and grew 19% yoy. Adjusted net interest income
declined 6.5% qoq. There is an unexplained shortfall of
Rs5-6bn in NII in 4Q FY11. We believe the shortfall could
be due to reversal of interest on restructured loans but
management has not given details.
Another one-time hit in 1Q FY12E. In 1Q FY12E, SBI will
provide Rs5bn as provisions on standard restructured loans,
Rs10bn to meet the RBI’s new requirements of increase in
bucket wise provisioning and Rs5.5bn as catch up bad loan
provisions to meet the earlier norm of 70% loan loss cover.
Cumulatively, SBI will have another one-time hit of Rs20bn
in 1Q FY12E.
Summary
Net profit for 4Q FY11 was a low Rs0.21bn against Rs28.3bn in 3Q11 and Rs18.7bn in 4Q10.
Contrary to perception, 4Q earnings were dragged down by a poor performance in core
operations rather than by one-off provisions. The drag on earnings in 4Q was more from lowerthan-expected NII and higher slippages leading to higher specific provisions than from pension
costs and catch up provisions to meet the 70% loan loss cover. Lower-than-expected net interest
income, higher slippages, one-time provision of Rs5bn on teaser home loans and a very high tax
rate were the key earnings drivers for 4Q FY11.
NII was lower than expected largely due to reversal of interest income of Rs5-6bn. We believe
this reversal of interest is on restructured loans. Slippages were significantly higher qoq at 3.6%
of lagged loans in 4Q FY11 against 2.5% in 3Q FY11 due to new NPLs in farm loans, retail loans
and mid corporates. Management also explained that they migrated fully to system-based NPLs
in 4Q, which was not the case in 3Q. Higher slippages led to higher specific loan loss provisions.
The tax rate was high as the bank could not create deferred tax assets for the huge pension
provisions it made during the year. While the full year provisions for pensions and shortfall loan
loss provisions are very high, in 4Q the provisions were not significantly higher than in 3Q. Total
retirement benefits for 4Q FY11 were Rs9bn against Rs7bn for 3Q FY11 and Rs8bn in 4Q FY10.
For the full year, total retirement benefits were Rs40.3bn against Rs20.3bn in FY10. The yoy
growth in retirement benefits is lower in 4Q FY11 than for full year FY11.
SBI announced a huge pension shortfall of Rs111bn on account of rebasing pensions to the ninth
bipartite wage agreement from the eighth. The shortfall of Rs24bn, which relates to the current
year, has been provided through the profit and loss account in FY11 while the shortfall of Rs80bn
(Rs126 per share) that relates to earlier years is provided through reserves. Going ahead we
believe the pension cost shortfalls will continue to be huge for each new wage agreement as the
pension accounting for SBI is different from other state banks and is lumpy rather than well
amortised. As such, pension costs and tax rates for SBI will remain higher than for other state
banks. We lower earnings as we build in higher operating expenses and provisions. We revise
our price target to Rs2,650 (Rs3,380 earlier). We downgrade our recommendation to IN-LINE
from OUTPERFORM.
Key earnings highlights
4Q earnings were dragged down by poor performance in core operations rather than oneoff provisions. Net profit for 4Q FY11 came in at a low Rs0.21bn against Rs28.3bn in 3Q11 and
Rs18.7bn in 4Q10. The drag on earnings in 4Q was more from lower-than-expected NII and
higher slippages leading to higher specific provisions than from pension costs and catch up
provisions to meet the 70% loan loss cover. One-off provisions impacted full year earnings more
than 4Q earnings. Lower-than-expected net interest income, higher slippages, one-time provision
of Rs5bn on teaser home loans and a very high tax rate were the key earnings drivers for 4Q
FY11.
NII was lower than expected largely due to reversal of interest income of Rs5-6bn. We believe
this reversal is on restructured loans. Slippages were significantly higher qoq at 3.6% of lagged
loans in 4Q FY11 against 2.5% in 3Q FY11 due to new NPLs in farm loans, retail loans and mid
corporate. Higher slippages lead to higher specific loan loss provisions. The tax rate was high as
the bank could not create deferred tax assets for the huge pension provisions it made during the
year. While the full year provisions for pensions and shortfall loan loss provisions are very high, in
4Q the provisions were not significantly higher than in 2Q. Total retirement benefits for 4Q FY11
were Rs9bn against Rs7bn for 3Q FY11 and Rs8bn in 4Q FY10. For the full year, total retirement
benefits were Rs40.3bn against Rs20.3bn in FY10. The yoy growth in retirement benefits is lower
in 4Q FY11 than for full year FY11.
Huge pension shortfall and sharp drop in net interest income are the key negative
highlights of 4Q results.
Huge interest reversal in 4Q dragged down NII. NII grew 20% yoy but declined sharply by 11%
qoq. NII growth was lower than expected and lagged loan growth of 4% qoq. SBI has a fund of
Rs300bn which is a defined contribution fund (as opposed to the defined benefit plan for older
recruits). SBI treats the amount of the fund as fixed deposits and pays interest to the fund at the
rate prescribed by the government. The rate of interest prescribed by the government increased
from 8.5% to 9.5%. In 3Q FY11, SBI had one-off interest on income tax refund of Rs2.5bn, which
did not recur in 4Q FY11. Even after accounting for these two issues, net interest income has
declined 7% qoq because of reversal of interest of Rs5-6bn on restructured loans. Reported
NIMs for 4Q FY11 were 3.07% against 3.6% in 3Q FY11. Adjusted NIMs for 4Q FY11 were
3.27% against 3.5% in 3Q FY11.
Sorting out the pension confusion. SBI’s pension accounting is different from other state
banks. Under AS15, other state banks assume a hike of 4-7% p.a. for the basic salary while
making actuarial valuations. While doing an actuarial valuation every year, SBI takes into account
the hike in dearness allowance only and does not assume any hike in basic salary. Basic salary
is the key component of total salary forming 50-60% of total salary. The hike in basic salary is
taken into account only when the actual wage agreement is finalized which is why whenever
there is a new wage agreement SBI has to rebase the basic salary cumulatively for five years
unlike other banks that assume some basic salary hikes every year. This is why with every new
wage agreement, SBI has a huge shortfall in pensions relative to other banks. This volatility is
unlikely to change in the future. SBI’s pension accounting is not fully in sync with AS 15 because
pensions at SBI are governed by a special pension scheme. For re-indexing or rebasing pensions
to the new wage agreement SBI needs government approval. For other banks, the pension
accounting is in sync with AS 15. It may be recalled that even in FY08 SBI had a pension shortfall
of ~Rs50bn when they had to provide for the revision in minimum pension from Rs15,000 to
Rs21,000 with retrospective effect from 2006. That shortfall was also knocked off against
reserves.
Total pension shortfall of Rs111bn for FY11 partly through the P/L and largely through
reserves. The total pension shortfall of moving from the eighth bipartite settlement to the ninth
bipartite settlement is Rs110bn. Of this, Rs24bn relates to the current year and has been charged
to the profit and loss account and Rs80bn has been deducted from shareholders’ funds.
According to AS 15 norms, the pension shortfall arising out of reindexation cannot be amortized
and has to be charged upfront which is why SBI had to make a charge against reserves rather
than amortizing the shortfall.
Higher slippage led to higher provision. SBI’s specific loan loss provisions of Rs33bn were
higher than Rs20bn in 3Q FY11. SBI made shortfall provisions of Rs5.5bn in 4Q FY11 against
Rs10.8bn in 9M FY11. Slippages for 4Q were also significantly higher than in 3Q which is why
prudential provisions have gone up.
Provisions for standard assets shown as a separate line item have also gone up substantially as
the bank made a one-time provision of Rs5bn on teaser home loans as mandated by the RBI.
The tax rate for FY11 stood at a high 45% against 33% in FY10. The tax rate was high
because additional provisions made by the bank for reaching the loan loss cover of 70% and
provisions made for pensions are not tax deductible. SBI provided Rs24bn towards pension
through the P/L account and Rs80bn through reserves. Retirement benefits are tax deductible
only up to 27% of salary. Provisions for pension in FY11 far exceeded that limit. The chairman
also explained that SBI creates a deferred tax asset only if there is certainty that the related
payments will materialize in the next 2-3 years. If the related payments are deferred for a longer
period as is the case with pensions, SBI does not create such an asset. In FY10, the bank had a
deferred tax benefit of Rs13.5bn. In FY11 they had a deferred tax payout of Rs9.7bn. Adjusted
for the deferred tax benefit, the tax rate for both years is comparable.
Going ahead, the tax rate will come down to 33-34%. However, it will rise to a much higher level
when the new wage settlement is finalized. The next wage agreement is effective Nov 2012.
High slippages: Slippages in 4Q FY11 were high at Rs56bn or 3.6% of lagged loans. In addition
the bank restructured loans of Rs15bn. Most of the slippages were from farm loans, mid
corporates and retail. Management indicated that slippages in the mid corporate segments will
continue to be high for the next few quarters.
Loans grew 19% yoy and 4% qoq. Deposits grew 16% yoy and 6% qoq. Growth in CASA
deposits remains strong at 23% yoy and 8% qoq. CD ratio is comfortable at 76%.
Earnings outlook. We expect earnings to grow 65% in FY12E on a low base and 21% in FY13E.
We have revised our earnings for FY12E and FY13E following the results announcement. We
have increased our forecast NIMs by 10bps for FY12E/FY13E . The bank has Rs380bn of high
cost fixed deposits contracted in 2008 which will reprice in FY12E at rates that are 150-250bps
lower than current rates. This will lend stability to NIMs. We expect NIM of 3.1% in FY12E against
3% in FY11E. Management is guiding towards a significant NIM expansion of 50bps from 4Q
levels but we believe that will be difficult to achieve in the current environment. While we build in
higher NIMs we also build in higher operating expenses and higher provisions.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
State Bank of India
Lowering earnings and price target
We lower FY12E earnings by 5% as we build in higher
operating expenses and provisions following 4Q results.
Book value has suffered from the one-time adjustment
of Rs80bn (Rs125/sh) against reserves in FY11.
We downgrade our target multiple from 1.8x to 1.7x as
we build in higher sustainable employee expenses.
We lower price target to Rs2,650 (22% lower than our
earlier Rs3,380) and downgrade rating to IN-LINE.
Uncertainty on pension accounting and additional onetime loan provisions of Rs20bn in 1Q FY12E will weigh
on the stock price performance in the short term.
Prior period pension adjustment knocks off Rs80bn
from reserves. SBI announced a pension shortfall of
Rs110bn, which occurred on account of benchmarking
pensions to the ninth bipartite settlement from the eighth.
SBI’s pension provisioning methodology is different from
those of other state banks. Of the total shortfall of Rs110bn,
Rs24bn relates to the current year and has been provided
through the P/L. Rs80bn relating to prior years has been
deducted from shareholders’ funds and no deferred tax
asset has been created for the shortfall. Due to this
adjustment Tier I declined to 7.7% in 4Q FY11 from 9.6% in
Dec-09, triggering capital raising.
NII drops sharply. Reported net interest income declined
11% qoq and grew 19% yoy. Adjusted net interest income
declined 6.5% qoq. There is an unexplained shortfall of
Rs5-6bn in NII in 4Q FY11. We believe the shortfall could
be due to reversal of interest on restructured loans but
management has not given details.
Another one-time hit in 1Q FY12E. In 1Q FY12E, SBI will
provide Rs5bn as provisions on standard restructured loans,
Rs10bn to meet the RBI’s new requirements of increase in
bucket wise provisioning and Rs5.5bn as catch up bad loan
provisions to meet the earlier norm of 70% loan loss cover.
Cumulatively, SBI will have another one-time hit of Rs20bn
in 1Q FY12E.
Summary
Net profit for 4Q FY11 was a low Rs0.21bn against Rs28.3bn in 3Q11 and Rs18.7bn in 4Q10.
Contrary to perception, 4Q earnings were dragged down by a poor performance in core
operations rather than by one-off provisions. The drag on earnings in 4Q was more from lowerthan-expected NII and higher slippages leading to higher specific provisions than from pension
costs and catch up provisions to meet the 70% loan loss cover. Lower-than-expected net interest
income, higher slippages, one-time provision of Rs5bn on teaser home loans and a very high tax
rate were the key earnings drivers for 4Q FY11.
NII was lower than expected largely due to reversal of interest income of Rs5-6bn. We believe
this reversal of interest is on restructured loans. Slippages were significantly higher qoq at 3.6%
of lagged loans in 4Q FY11 against 2.5% in 3Q FY11 due to new NPLs in farm loans, retail loans
and mid corporates. Management also explained that they migrated fully to system-based NPLs
in 4Q, which was not the case in 3Q. Higher slippages led to higher specific loan loss provisions.
The tax rate was high as the bank could not create deferred tax assets for the huge pension
provisions it made during the year. While the full year provisions for pensions and shortfall loan
loss provisions are very high, in 4Q the provisions were not significantly higher than in 3Q. Total
retirement benefits for 4Q FY11 were Rs9bn against Rs7bn for 3Q FY11 and Rs8bn in 4Q FY10.
For the full year, total retirement benefits were Rs40.3bn against Rs20.3bn in FY10. The yoy
growth in retirement benefits is lower in 4Q FY11 than for full year FY11.
SBI announced a huge pension shortfall of Rs111bn on account of rebasing pensions to the ninth
bipartite wage agreement from the eighth. The shortfall of Rs24bn, which relates to the current
year, has been provided through the profit and loss account in FY11 while the shortfall of Rs80bn
(Rs126 per share) that relates to earlier years is provided through reserves. Going ahead we
believe the pension cost shortfalls will continue to be huge for each new wage agreement as the
pension accounting for SBI is different from other state banks and is lumpy rather than well
amortised. As such, pension costs and tax rates for SBI will remain higher than for other state
banks. We lower earnings as we build in higher operating expenses and provisions. We revise
our price target to Rs2,650 (Rs3,380 earlier). We downgrade our recommendation to IN-LINE
from OUTPERFORM.
Key earnings highlights
4Q earnings were dragged down by poor performance in core operations rather than oneoff provisions. Net profit for 4Q FY11 came in at a low Rs0.21bn against Rs28.3bn in 3Q11 and
Rs18.7bn in 4Q10. The drag on earnings in 4Q was more from lower-than-expected NII and
higher slippages leading to higher specific provisions than from pension costs and catch up
provisions to meet the 70% loan loss cover. One-off provisions impacted full year earnings more
than 4Q earnings. Lower-than-expected net interest income, higher slippages, one-time provision
of Rs5bn on teaser home loans and a very high tax rate were the key earnings drivers for 4Q
FY11.
NII was lower than expected largely due to reversal of interest income of Rs5-6bn. We believe
this reversal is on restructured loans. Slippages were significantly higher qoq at 3.6% of lagged
loans in 4Q FY11 against 2.5% in 3Q FY11 due to new NPLs in farm loans, retail loans and mid
corporate. Higher slippages lead to higher specific loan loss provisions. The tax rate was high as
the bank could not create deferred tax assets for the huge pension provisions it made during the
year. While the full year provisions for pensions and shortfall loan loss provisions are very high, in
4Q the provisions were not significantly higher than in 2Q. Total retirement benefits for 4Q FY11
were Rs9bn against Rs7bn for 3Q FY11 and Rs8bn in 4Q FY10. For the full year, total retirement
benefits were Rs40.3bn against Rs20.3bn in FY10. The yoy growth in retirement benefits is lower
in 4Q FY11 than for full year FY11.
Huge pension shortfall and sharp drop in net interest income are the key negative
highlights of 4Q results.
Huge interest reversal in 4Q dragged down NII. NII grew 20% yoy but declined sharply by 11%
qoq. NII growth was lower than expected and lagged loan growth of 4% qoq. SBI has a fund of
Rs300bn which is a defined contribution fund (as opposed to the defined benefit plan for older
recruits). SBI treats the amount of the fund as fixed deposits and pays interest to the fund at the
rate prescribed by the government. The rate of interest prescribed by the government increased
from 8.5% to 9.5%. In 3Q FY11, SBI had one-off interest on income tax refund of Rs2.5bn, which
did not recur in 4Q FY11. Even after accounting for these two issues, net interest income has
declined 7% qoq because of reversal of interest of Rs5-6bn on restructured loans. Reported
NIMs for 4Q FY11 were 3.07% against 3.6% in 3Q FY11. Adjusted NIMs for 4Q FY11 were
3.27% against 3.5% in 3Q FY11.
Sorting out the pension confusion. SBI’s pension accounting is different from other state
banks. Under AS15, other state banks assume a hike of 4-7% p.a. for the basic salary while
making actuarial valuations. While doing an actuarial valuation every year, SBI takes into account
the hike in dearness allowance only and does not assume any hike in basic salary. Basic salary
is the key component of total salary forming 50-60% of total salary. The hike in basic salary is
taken into account only when the actual wage agreement is finalized which is why whenever
there is a new wage agreement SBI has to rebase the basic salary cumulatively for five years
unlike other banks that assume some basic salary hikes every year. This is why with every new
wage agreement, SBI has a huge shortfall in pensions relative to other banks. This volatility is
unlikely to change in the future. SBI’s pension accounting is not fully in sync with AS 15 because
pensions at SBI are governed by a special pension scheme. For re-indexing or rebasing pensions
to the new wage agreement SBI needs government approval. For other banks, the pension
accounting is in sync with AS 15. It may be recalled that even in FY08 SBI had a pension shortfall
of ~Rs50bn when they had to provide for the revision in minimum pension from Rs15,000 to
Rs21,000 with retrospective effect from 2006. That shortfall was also knocked off against
reserves.
Total pension shortfall of Rs111bn for FY11 partly through the P/L and largely through
reserves. The total pension shortfall of moving from the eighth bipartite settlement to the ninth
bipartite settlement is Rs110bn. Of this, Rs24bn relates to the current year and has been charged
to the profit and loss account and Rs80bn has been deducted from shareholders’ funds.
According to AS 15 norms, the pension shortfall arising out of reindexation cannot be amortized
and has to be charged upfront which is why SBI had to make a charge against reserves rather
than amortizing the shortfall.
Higher slippage led to higher provision. SBI’s specific loan loss provisions of Rs33bn were
higher than Rs20bn in 3Q FY11. SBI made shortfall provisions of Rs5.5bn in 4Q FY11 against
Rs10.8bn in 9M FY11. Slippages for 4Q were also significantly higher than in 3Q which is why
prudential provisions have gone up.
Provisions for standard assets shown as a separate line item have also gone up substantially as
the bank made a one-time provision of Rs5bn on teaser home loans as mandated by the RBI.
The tax rate for FY11 stood at a high 45% against 33% in FY10. The tax rate was high
because additional provisions made by the bank for reaching the loan loss cover of 70% and
provisions made for pensions are not tax deductible. SBI provided Rs24bn towards pension
through the P/L account and Rs80bn through reserves. Retirement benefits are tax deductible
only up to 27% of salary. Provisions for pension in FY11 far exceeded that limit. The chairman
also explained that SBI creates a deferred tax asset only if there is certainty that the related
payments will materialize in the next 2-3 years. If the related payments are deferred for a longer
period as is the case with pensions, SBI does not create such an asset. In FY10, the bank had a
deferred tax benefit of Rs13.5bn. In FY11 they had a deferred tax payout of Rs9.7bn. Adjusted
for the deferred tax benefit, the tax rate for both years is comparable.
Going ahead, the tax rate will come down to 33-34%. However, it will rise to a much higher level
when the new wage settlement is finalized. The next wage agreement is effective Nov 2012.
High slippages: Slippages in 4Q FY11 were high at Rs56bn or 3.6% of lagged loans. In addition
the bank restructured loans of Rs15bn. Most of the slippages were from farm loans, mid
corporates and retail. Management indicated that slippages in the mid corporate segments will
continue to be high for the next few quarters.
Loans grew 19% yoy and 4% qoq. Deposits grew 16% yoy and 6% qoq. Growth in CASA
deposits remains strong at 23% yoy and 8% qoq. CD ratio is comfortable at 76%.
Earnings outlook. We expect earnings to grow 65% in FY12E on a low base and 21% in FY13E.
We have revised our earnings for FY12E and FY13E following the results announcement. We
have increased our forecast NIMs by 10bps for FY12E/FY13E . The bank has Rs380bn of high
cost fixed deposits contracted in 2008 which will reprice in FY12E at rates that are 150-250bps
lower than current rates. This will lend stability to NIMs. We expect NIM of 3.1% in FY12E against
3% in FY11E. Management is guiding towards a significant NIM expansion of 50bps from 4Q
levels but we believe that will be difficult to achieve in the current environment. While we build in
higher NIMs we also build in higher operating expenses and higher provisions.
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