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State Bank of India (SBI.BO)
1Q12 Results: Modest Headline; Improving Underlying
1Q12 profits down 46% yoy; but core profitability improving — SBI’s headline
earnings were weak, well below estimates and dragged down by higher markdowns
and high effective tax rate (49%). SBI’s deposit franchise (48% CASA) and business
momentum (19% loan growth) remain healthy. Pre-provision profits (ex-trading gains)
were healthy (+23% yoy), and net interest margins improved sharply (up 55bps qoq).
We believe much of the pain in 1Q12 was non-recurring (markdowns, catch-up
provisions); sustained high NIMs can lead to better earnings outlook medium term.
P&L: Strong margins, modest fees, but dragged by higher markdowns and taxes
— SBI’s NIMs increased smartly (362bps now); while a surprise, it was more the pace
of it, rather than direction. NIMs should sustain as management seems to have fixed its
below industry loan pricing (some upward bias near term). Fee growth was modest
(+9% yoy), as large corporate loans, syndication fees were lower. Operating expenses
appear to have stabilized for now (cost income ratio ~45%). Higher investment
markdowns (Rs10bn), catch-up loan losses (Rs18bn) and high taxes (49% tax rate)
dragged 1Q12 earnings down. We believe a large part of this is non-recurring
(~Rs23bn) and along with a normalized tax rate, should support earnings ahead.
Balance sheet: Growth, funding healthy, needs better asset quality performance
— SBI’s strong funding mix remains its key strength and supports healthy loan growth.
Asset quality though has been a challenge – slippages remain high (3.4% annualized)
and so do credit costs (1.7%). Management appears committed to improve processes,
though improvements likely gradual and near-term outlook (and guidance) challenging.
SBI’s Tier 1 (7.6% is relative low and it needs capital – management says government
has agreed to put in some capital in FY12 – quantum, timing still uncertain.
Gradual stabilization, improving returns should drive stock returns medium term
— SBI has stabilized operationally (healthy NIMs, PPOP growth) and valuations are
reasonable (1.4x 1Yr Fwd consol P/BV). While near-term earnings, asset quality
remains challenging – we believe beyond the current pain, potential earnings
i mprovement could be meaningful medium term and should drive stock performance.
State Bank of India
Company description
SBI is India's largest bank with around 18% market share in deposits and loans,
over 13,500 branches and more than 130m customers. Together with its five
associate banks (ownership ranging from 75% to 100%), the SBI group has a 25%
market share in deposits and loans, and has over 16,000 branches. SBI has the
largest overseas presence among Indian banks, with 54 offices in 28 countries. The
Government of India owns 59.73% of the bank. SBI is a banker to most state
governments, and has a dominant share of government fee business. SBI has a
presence in other financial services through subsidiaries and joint ventures. It has a
joint venture with Cardiff for life insurance and also has a presence in asset
management, investment banking and primary dealership. The SBI group has more
than 25,000 ATMs, the largest spread in the country, and is aggressively expanding
its technology-based offering across its existing network.
Investment strategy
We rate SBI Buy/Low Risk. SBI has faced significant pain recently in terms of
operational, accounting and execution slippages. However, we believe its strong
deposit franchise, strong market positioning, well diversified asset book and large
distribution network are key strengths, which position it well in a rising interest rate
and tight liquidity environment. While there are challenges on execution, the new
management does seem to be focused on making operational improvements. We
believe the SBI will see near-term improvements in key operating parameters,
namely net interest margins, operating costs and asset quality slippages. Also, a
likely healthy economic and growth environment will also improve its own growth
and return profile going ahead. We see value in the stock at current levels.
Valuation
Our target price of Rs2,650 is based on our EVA model, in which we assume a riskfree
rate of 8.0%, in line with the market level. Our longer-term loan loss assumption
is 100bps pa (in line with the industry). Our target price for SBI includes a subsidiary
valuation of Rs603: Life Insurance at Rs91 per share, associate banks at 1.25x 1Yr
Fwd PBV (Rs418), value for SBI's Asset management business (Rs24, 5% of
assets) and incorporates capital markets subsidiary at Rs61 based on 10x 1Yr Fwd
PE. We also use a sum of parts valuation which values SBI at Rs2,570 per share. In
this valuation, we benchmark the consolidated banking business off a 1.6x 1Yr Fwd
P/BV – in line with our benchmark valuation for its peers. We also add Rs185 per
share for its non-banking subsidiary businesses as detailed earlier. We base our
target price on EVA, as we believe it better adjusts for the relatively dynamic cost of
capital and better captures the long-term value of the business.
Risks
We rate SBI as Low Risk, in line with CIRA's quantitative-based risk rating system.
We believe this is appropriate given the nature of SBI's business, the quality of
management, and the direct government ownership. The downside risks that could
impede the stock from reaching our target price include: (1) A sharp rise in interest
rates; (2) Asset quality concerns given strong loan growth and high interest rates;
(3) Lack of liquidity or deposit growth; (4) Government involvement could be
contrary to the interests of minority shareholders; and (5) A lack of capital to support
growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
State Bank of India (SBI.BO)
1Q12 Results: Modest Headline; Improving Underlying
1Q12 profits down 46% yoy; but core profitability improving — SBI’s headline
earnings were weak, well below estimates and dragged down by higher markdowns
and high effective tax rate (49%). SBI’s deposit franchise (48% CASA) and business
momentum (19% loan growth) remain healthy. Pre-provision profits (ex-trading gains)
were healthy (+23% yoy), and net interest margins improved sharply (up 55bps qoq).
We believe much of the pain in 1Q12 was non-recurring (markdowns, catch-up
provisions); sustained high NIMs can lead to better earnings outlook medium term.
P&L: Strong margins, modest fees, but dragged by higher markdowns and taxes
— SBI’s NIMs increased smartly (362bps now); while a surprise, it was more the pace
of it, rather than direction. NIMs should sustain as management seems to have fixed its
below industry loan pricing (some upward bias near term). Fee growth was modest
(+9% yoy), as large corporate loans, syndication fees were lower. Operating expenses
appear to have stabilized for now (cost income ratio ~45%). Higher investment
markdowns (Rs10bn), catch-up loan losses (Rs18bn) and high taxes (49% tax rate)
dragged 1Q12 earnings down. We believe a large part of this is non-recurring
(~Rs23bn) and along with a normalized tax rate, should support earnings ahead.
Balance sheet: Growth, funding healthy, needs better asset quality performance
— SBI’s strong funding mix remains its key strength and supports healthy loan growth.
Asset quality though has been a challenge – slippages remain high (3.4% annualized)
and so do credit costs (1.7%). Management appears committed to improve processes,
though improvements likely gradual and near-term outlook (and guidance) challenging.
SBI’s Tier 1 (7.6% is relative low and it needs capital – management says government
has agreed to put in some capital in FY12 – quantum, timing still uncertain.
Gradual stabilization, improving returns should drive stock returns medium term
— SBI has stabilized operationally (healthy NIMs, PPOP growth) and valuations are
reasonable (1.4x 1Yr Fwd consol P/BV). While near-term earnings, asset quality
remains challenging – we believe beyond the current pain, potential earnings
i mprovement could be meaningful medium term and should drive stock performance.
State Bank of India
Company description
SBI is India's largest bank with around 18% market share in deposits and loans,
over 13,500 branches and more than 130m customers. Together with its five
associate banks (ownership ranging from 75% to 100%), the SBI group has a 25%
market share in deposits and loans, and has over 16,000 branches. SBI has the
largest overseas presence among Indian banks, with 54 offices in 28 countries. The
Government of India owns 59.73% of the bank. SBI is a banker to most state
governments, and has a dominant share of government fee business. SBI has a
presence in other financial services through subsidiaries and joint ventures. It has a
joint venture with Cardiff for life insurance and also has a presence in asset
management, investment banking and primary dealership. The SBI group has more
than 25,000 ATMs, the largest spread in the country, and is aggressively expanding
its technology-based offering across its existing network.
Investment strategy
We rate SBI Buy/Low Risk. SBI has faced significant pain recently in terms of
operational, accounting and execution slippages. However, we believe its strong
deposit franchise, strong market positioning, well diversified asset book and large
distribution network are key strengths, which position it well in a rising interest rate
and tight liquidity environment. While there are challenges on execution, the new
management does seem to be focused on making operational improvements. We
believe the SBI will see near-term improvements in key operating parameters,
namely net interest margins, operating costs and asset quality slippages. Also, a
likely healthy economic and growth environment will also improve its own growth
and return profile going ahead. We see value in the stock at current levels.
Valuation
Our target price of Rs2,650 is based on our EVA model, in which we assume a riskfree
rate of 8.0%, in line with the market level. Our longer-term loan loss assumption
is 100bps pa (in line with the industry). Our target price for SBI includes a subsidiary
valuation of Rs603: Life Insurance at Rs91 per share, associate banks at 1.25x 1Yr
Fwd PBV (Rs418), value for SBI's Asset management business (Rs24, 5% of
assets) and incorporates capital markets subsidiary at Rs61 based on 10x 1Yr Fwd
PE. We also use a sum of parts valuation which values SBI at Rs2,570 per share. In
this valuation, we benchmark the consolidated banking business off a 1.6x 1Yr Fwd
P/BV – in line with our benchmark valuation for its peers. We also add Rs185 per
share for its non-banking subsidiary businesses as detailed earlier. We base our
target price on EVA, as we believe it better adjusts for the relatively dynamic cost of
capital and better captures the long-term value of the business.
Risks
We rate SBI as Low Risk, in line with CIRA's quantitative-based risk rating system.
We believe this is appropriate given the nature of SBI's business, the quality of
management, and the direct government ownership. The downside risks that could
impede the stock from reaching our target price include: (1) A sharp rise in interest
rates; (2) Asset quality concerns given strong loan growth and high interest rates;
(3) Lack of liquidity or deposit growth; (4) Government involvement could be
contrary to the interests of minority shareholders; and (5) A lack of capital to support
growth.
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