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Setting high targets
Presenting to investors in US and UK, the management of SBI presented three
key targets for FY12- loan growth of ~18%, 20bps expansion in margins and
keeping gross NPLs flat (in absolute terms). Among the three targets, we
understand that asset quality is deservingly getting most attention and recent
initiatives instil some confidence. However, it will be challenging for SBI to
achieve all three targets concurrently and we see highest potential risk to its
loan growth target, as it focuses on quality of lending and recovery from NPA
accounts. While these initiatives will make SBI a stronger bank in the longer
run, we remain cautious in the near term. Maintain U-PF.
Focusing on asset quality improvement
With high delinquencies over past three years (fresh delinquency ratio averaged at
2.6% of last years’ loans), SBI’s management has intensified its vigilance and is
taking corrective actions. These include (1) appointment of a Dy. MD to oversee
the stressed asset portfolio (2) set-up of a call centre to focus on recoveries and
(3) assignment of recovery responsibilities individually to the staff. With these
initiatives, SBI targets to keep absolute amount of gross NPLs flat YoY in FY12.
Margin improvement will be a challenge
The management also targets to improve its margins by 20bps YoY during FY12 to
3.5%. In this direction, it had recently raised lending rates by 75bps, about 25bps
higher than peers to make-good the delay in rate hike strategically done to gain
market share. While its high CASA ratio and recent lending rate hikes position it
well to defend margins, it will be a challenge to report margin expansion in a high
interest rate environment with a leveraged balance sheet and near peak LDR.
Loan growth target appears to be the key risk
We understand that focus on asset quality improvement and margin expansion is
quite intense. While management’s loan growth target of ~18% is a bit lower than
consensus estimate of 19-20%, we believe that even the internal target could be
difficult to achieve as focus on asset quality and margin targets may require it to
consolidate in FY12. As the bank increases rigour on credit as well as profitability
appraisal and branch staff takes much more accountability for recoveries, fresh
disbursals could slow. Moreover, the macro economic conditions and bank’s lower
Tier I ratio will add to the pressure.
Maintain U-PF
SBI has one of the best liability franchises in the Indian banking sector and focus
on asset quality will help to improve profitability and uplift investor confidence.
However in the near term, SBI’s consolidation may help peers to strengthen their
position. With valuations at 1.6x FY12 adjusted consolidated PB for 18% ROE we
believe that the stock will continue to underperform.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Setting high targets
Presenting to investors in US and UK, the management of SBI presented three
key targets for FY12- loan growth of ~18%, 20bps expansion in margins and
keeping gross NPLs flat (in absolute terms). Among the three targets, we
understand that asset quality is deservingly getting most attention and recent
initiatives instil some confidence. However, it will be challenging for SBI to
achieve all three targets concurrently and we see highest potential risk to its
loan growth target, as it focuses on quality of lending and recovery from NPA
accounts. While these initiatives will make SBI a stronger bank in the longer
run, we remain cautious in the near term. Maintain U-PF.
Focusing on asset quality improvement
With high delinquencies over past three years (fresh delinquency ratio averaged at
2.6% of last years’ loans), SBI’s management has intensified its vigilance and is
taking corrective actions. These include (1) appointment of a Dy. MD to oversee
the stressed asset portfolio (2) set-up of a call centre to focus on recoveries and
(3) assignment of recovery responsibilities individually to the staff. With these
initiatives, SBI targets to keep absolute amount of gross NPLs flat YoY in FY12.
Margin improvement will be a challenge
The management also targets to improve its margins by 20bps YoY during FY12 to
3.5%. In this direction, it had recently raised lending rates by 75bps, about 25bps
higher than peers to make-good the delay in rate hike strategically done to gain
market share. While its high CASA ratio and recent lending rate hikes position it
well to defend margins, it will be a challenge to report margin expansion in a high
interest rate environment with a leveraged balance sheet and near peak LDR.
Loan growth target appears to be the key risk
We understand that focus on asset quality improvement and margin expansion is
quite intense. While management’s loan growth target of ~18% is a bit lower than
consensus estimate of 19-20%, we believe that even the internal target could be
difficult to achieve as focus on asset quality and margin targets may require it to
consolidate in FY12. As the bank increases rigour on credit as well as profitability
appraisal and branch staff takes much more accountability for recoveries, fresh
disbursals could slow. Moreover, the macro economic conditions and bank’s lower
Tier I ratio will add to the pressure.
Maintain U-PF
SBI has one of the best liability franchises in the Indian banking sector and focus
on asset quality will help to improve profitability and uplift investor confidence.
However in the near term, SBI’s consolidation may help peers to strengthen their
position. With valuations at 1.6x FY12 adjusted consolidated PB for 18% ROE we
believe that the stock will continue to underperform.
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