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State Bank of India Overweight
SBI.BO, SBIN IN
Annual report analysis: some positives in the gloom
SBI’s annual report analysis highlights risks similar to other PSU banks
on pension and increasing power exposure. Margins should be relatively
resilient, aided by a superior liability franchise. We maintain our
Overweight as valuations are undemanding post 4Q11 but note that
credit costs will continue to remain elevated over the next two quarters.
Slippages broad based: Corporates accounted for 33% of incremental
NPAs, with textiles, gems, steel and chemicals the key drivers. Power
exposure at <5% remains relatively lower than most peers, despite ~50%
growth. Delinquencies should slow in FY12, though we expected
elevated credit charges in 1HFY12 from lagged provisioning.
Pension highlights: SBI (parent) continued with relatively conservative
assumptions in FY11, though long-term risks from mortality and wage
inflation are still high. The associate bank has been more aggressive in
their pension provisioning, with significant cuts in wage inflation
assumptions – this presents an elevated risk.
Positives: (1) Deposit franchise improved with ~200bps improvement in
CASA coupled with improvement in deposit concentration. The NIM
outlook remains better than PSU peers due to repricing of 1000-day
deposits and the aggressive loan rate hikes taken. (2) Associate banks’
performance was stable with ~22% y/y PAT growth.
Our 10-year analysis highlights SBI's stubbornly low ROAs as its key
challenge. Improved loan pricing and stronger underwriting are the best
opportunities to improve ROAs, given that management has little control
over costs.
Our OW rating stays, though we continue to prefer private sector banks,
given capital challenges and near-term credit cost issues. The key risk is
the cancellation of the rights issue, which would severely constrict
growth
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
State Bank of India Overweight
SBI.BO, SBIN IN
Annual report analysis: some positives in the gloom
SBI’s annual report analysis highlights risks similar to other PSU banks
on pension and increasing power exposure. Margins should be relatively
resilient, aided by a superior liability franchise. We maintain our
Overweight as valuations are undemanding post 4Q11 but note that
credit costs will continue to remain elevated over the next two quarters.
Slippages broad based: Corporates accounted for 33% of incremental
NPAs, with textiles, gems, steel and chemicals the key drivers. Power
exposure at <5% remains relatively lower than most peers, despite ~50%
growth. Delinquencies should slow in FY12, though we expected
elevated credit charges in 1HFY12 from lagged provisioning.
Pension highlights: SBI (parent) continued with relatively conservative
assumptions in FY11, though long-term risks from mortality and wage
inflation are still high. The associate bank has been more aggressive in
their pension provisioning, with significant cuts in wage inflation
assumptions – this presents an elevated risk.
Positives: (1) Deposit franchise improved with ~200bps improvement in
CASA coupled with improvement in deposit concentration. The NIM
outlook remains better than PSU peers due to repricing of 1000-day
deposits and the aggressive loan rate hikes taken. (2) Associate banks’
performance was stable with ~22% y/y PAT growth.
Our 10-year analysis highlights SBI's stubbornly low ROAs as its key
challenge. Improved loan pricing and stronger underwriting are the best
opportunities to improve ROAs, given that management has little control
over costs.
Our OW rating stays, though we continue to prefer private sector banks,
given capital challenges and near-term credit cost issues. The key risk is
the cancellation of the rights issue, which would severely constrict
growth
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