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State Bank of India (SBIN)
Banks/Financial Institutions
Building confidence; challenges remain. Our recent discussion with the
management at the conference/analyst meet focused on asset quality and margins
outlook—areas which the bank disappointed in the previous quarter. While we draw
some comfort on asset quality, we believe that 3.5% margin guidance appears
stretched considering the adjusted exit margins of 3.3% in 4QFY11. Near-term
earnings, especially 1QFY12, may be under stress due to revised provisions. However,
we expect much better trends in profitability over the next few quarters on the back of
lower provisions. We have revised our earnings downwards by about 2-6% in FY2012-
13E to factor higher provisions for investment book and tax rate. The stock trades at
1.3X FY2013E (adjusted) book. Maintain BUY.
Strengthening teams to monitor slippages and increase recovery trends
The bank is targeting overall slippages at 1.9% versus 2.9% in FY2011 on the back of better
monitoring and improved macro environment. Fresh delinquencies are expected to decline to `145
bn in FY2012E as against `180 bn in FY2011. All loans are under system-based recognition. The
management highlighted that there are no fresh requests for restructuring loans barring the few
which are already in the public domain.
Recovery in agriculture loans has improved (the sector saw higher slippages in FY2011) over the
past two months. The bank has beefed up its monitoring team for recovering agriculture NPLs.
Overall telecom exposure is `330 bn and `15 bn for companies currently under investigation. SEB
exposure is `60 bn and the management is not worried on the same, as it has adequate
guarantees and escrow redressel.
Overall, gross NPLs (absolute) are expected to remain flat yoy (pre-write-offs) on the back of similar
recoveries/upgrades. Gross NPLs ratio will decline to less than 2.75% in FY2012E from 3.3% in
FY2011.
Provisions to remain high in 1HFY12E on the back of revised provisioning guidelines
The bank will be making provisions in 1HFY12E due to (1) `11 bn for moving towards higher
coverage (70% coverage by September 2012), (2) `10 bn for revised provisions for sub-standard
and doubtful loans and (3) `5 bn for restructured loans. Out of this, about `20 bn will come in
1QFY12. There is some stress emerging in the textiles sector but airline exposure look comfortable
currently. In 1Q, the bank will also have to make high MTM provisions, given the current yield
levels. Yields have already increased by 35 bps over March 2011.
Maintaining margin forecast for FY2012E at 3.5%; repricing to lead
improvement
SBI continues to maintain its target NIMs of about 3.5% in FY2012E from 3.3% in FY2011.
Post the hikes taken in 4QFY11, there has been improvement in NIMs in April (margins have
increased to 3.15% versus 3.07% in 4QFY11). The month of May is critical as the bank took
lending rate hikes only on April 25, 2011 (25 bps PLR and base rate) and May 12, 2011 (75
bps PLR and base rate). The bank is benefitting from the renewal of the high-cost 1,000-day
deposits raised in 2008 as they are getting renewed at similar or lower rates.
The negative impact of higher savings rate is about 15 bps for SBI and costs have increased
accordingly. The management also clarified that 4QFY11 margins were understated by 20
bps (10 bps due to derecognition of interest on restructured loans and 10 bps due to higher
interest on provident fund balances).
Subdued loan growth expectations for FY2012E
In FY2012E, the management expects a more subdued loan growth of 15-16% yoy
(balanced loan growth from retail, SME and corporate sector). Infrastructure loans have seen
some moderation in recent times. FY2011 saw credit consumed mainly from metals (steel)
and infrastructure, especially power while overall loans to petroleum companies declined.
Infrastructure exposure is about 13% of overall loans of which power exposure is about
`300 bn and telecom exposure is `326 bn. Total exposure to airlines is about `45 bn. Most
of the infrastructure loan exposures are for projects under implementation—very few
operational ones currently. Current delay in power is about 6 months in a few cases.
More conservative policy on accounting for future provisional costs
SBI would look to have a more conservative policy on accounting of future provisional
expenses like wage revisions and reduce one-off charges similar to what was taken through
reserves in 4QFY11. Also, FY2011 saw higher gratuity expenses of `15.7 bn due to revised
gratuity benefits (increase in limit from `0.3 mn to `1 mn) which will decline in FY2012E.
The total charges for pension were `25 bn through the P&L and `79 bn through reserves.
The bank mentioned that all pension-related gaps have been addressed. In FY2012E, the
total pension costs are likely to be `24 bn and gratuity provisions of `1 bn. We expect costincome
ratio at about 47-48% levels in FY2012-13E.
Other key highlights of the discussion
Confusion regarding higher tax rates still prevails. Expenses of about `48 bn were not tax
deductible, resulting in higher tax provision in FY2011 and the management has taken a
cautious approach on tax deductibility of various provisions taken. Even in FY2012E, the
management expects the tax rates to remain high at about 37.5%, higher than our
expectation of 34%.
No near-term concern on overall adequacy ratios and there has been no further update
on the rights issue. The bank has sufficient head-room to raise perpetual debt (there is
about `44 bn of Innovative Perpetual Debt in overall tier-1).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
State Bank of India (SBIN)
Banks/Financial Institutions
Building confidence; challenges remain. Our recent discussion with the
management at the conference/analyst meet focused on asset quality and margins
outlook—areas which the bank disappointed in the previous quarter. While we draw
some comfort on asset quality, we believe that 3.5% margin guidance appears
stretched considering the adjusted exit margins of 3.3% in 4QFY11. Near-term
earnings, especially 1QFY12, may be under stress due to revised provisions. However,
we expect much better trends in profitability over the next few quarters on the back of
lower provisions. We have revised our earnings downwards by about 2-6% in FY2012-
13E to factor higher provisions for investment book and tax rate. The stock trades at
1.3X FY2013E (adjusted) book. Maintain BUY.
Strengthening teams to monitor slippages and increase recovery trends
The bank is targeting overall slippages at 1.9% versus 2.9% in FY2011 on the back of better
monitoring and improved macro environment. Fresh delinquencies are expected to decline to `145
bn in FY2012E as against `180 bn in FY2011. All loans are under system-based recognition. The
management highlighted that there are no fresh requests for restructuring loans barring the few
which are already in the public domain.
Recovery in agriculture loans has improved (the sector saw higher slippages in FY2011) over the
past two months. The bank has beefed up its monitoring team for recovering agriculture NPLs.
Overall telecom exposure is `330 bn and `15 bn for companies currently under investigation. SEB
exposure is `60 bn and the management is not worried on the same, as it has adequate
guarantees and escrow redressel.
Overall, gross NPLs (absolute) are expected to remain flat yoy (pre-write-offs) on the back of similar
recoveries/upgrades. Gross NPLs ratio will decline to less than 2.75% in FY2012E from 3.3% in
FY2011.
Provisions to remain high in 1HFY12E on the back of revised provisioning guidelines
The bank will be making provisions in 1HFY12E due to (1) `11 bn for moving towards higher
coverage (70% coverage by September 2012), (2) `10 bn for revised provisions for sub-standard
and doubtful loans and (3) `5 bn for restructured loans. Out of this, about `20 bn will come in
1QFY12. There is some stress emerging in the textiles sector but airline exposure look comfortable
currently. In 1Q, the bank will also have to make high MTM provisions, given the current yield
levels. Yields have already increased by 35 bps over March 2011.
Maintaining margin forecast for FY2012E at 3.5%; repricing to lead
improvement
SBI continues to maintain its target NIMs of about 3.5% in FY2012E from 3.3% in FY2011.
Post the hikes taken in 4QFY11, there has been improvement in NIMs in April (margins have
increased to 3.15% versus 3.07% in 4QFY11). The month of May is critical as the bank took
lending rate hikes only on April 25, 2011 (25 bps PLR and base rate) and May 12, 2011 (75
bps PLR and base rate). The bank is benefitting from the renewal of the high-cost 1,000-day
deposits raised in 2008 as they are getting renewed at similar or lower rates.
The negative impact of higher savings rate is about 15 bps for SBI and costs have increased
accordingly. The management also clarified that 4QFY11 margins were understated by 20
bps (10 bps due to derecognition of interest on restructured loans and 10 bps due to higher
interest on provident fund balances).
Subdued loan growth expectations for FY2012E
In FY2012E, the management expects a more subdued loan growth of 15-16% yoy
(balanced loan growth from retail, SME and corporate sector). Infrastructure loans have seen
some moderation in recent times. FY2011 saw credit consumed mainly from metals (steel)
and infrastructure, especially power while overall loans to petroleum companies declined.
Infrastructure exposure is about 13% of overall loans of which power exposure is about
`300 bn and telecom exposure is `326 bn. Total exposure to airlines is about `45 bn. Most
of the infrastructure loan exposures are for projects under implementation—very few
operational ones currently. Current delay in power is about 6 months in a few cases.
More conservative policy on accounting for future provisional costs
SBI would look to have a more conservative policy on accounting of future provisional
expenses like wage revisions and reduce one-off charges similar to what was taken through
reserves in 4QFY11. Also, FY2011 saw higher gratuity expenses of `15.7 bn due to revised
gratuity benefits (increase in limit from `0.3 mn to `1 mn) which will decline in FY2012E.
The total charges for pension were `25 bn through the P&L and `79 bn through reserves.
The bank mentioned that all pension-related gaps have been addressed. In FY2012E, the
total pension costs are likely to be `24 bn and gratuity provisions of `1 bn. We expect costincome
ratio at about 47-48% levels in FY2012-13E.
Other key highlights of the discussion
Confusion regarding higher tax rates still prevails. Expenses of about `48 bn were not tax
deductible, resulting in higher tax provision in FY2011 and the management has taken a
cautious approach on tax deductibility of various provisions taken. Even in FY2012E, the
management expects the tax rates to remain high at about 37.5%, higher than our
expectation of 34%.
No near-term concern on overall adequacy ratios and there has been no further update
on the rights issue. The bank has sufficient head-room to raise perpetual debt (there is
about `44 bn of Innovative Perpetual Debt in overall tier-1).
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