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State Bank of India
F1Q12 Preview – What Are
We Expecting For Tomorrow
Quick Comment: State Bank of India is due to
announce its quarterly results on August 13, 2011
(Saturday). Reported earnings this quarter are likely to
be volatile. We expect profits of Rs. 27 bn at the parent
level (up from Rs. 0.2 bn in the previous quarter and
down 7% YoY). There are no IBES / Factset estimates
available for quarterly profits but Bloomberg consensus
profit estimate for SBI is much lower at Rs. 20 bn. In our
view, the difference could possibly be due to the
assumption on loan loss charges for the quarter.
Below, we highlight our expectations for the key
variables:
a) NII growth: We are building in headline NII growth of
9% QoQ and 23% YoY. In the previous quarter –
reported margins at 3.07% were suppressed on account
of multiple one-offs. Adjusted margins were closer to
3.25-3.3%. Given the aggressive lending rate increases
by SBI, we expect margins to be supported and remain
broadly stable QoQ – unlike other SOE banks where
NIM’s were down materially.
We highlight that the SBI Chairman in press reports in
mid-July had indicated that margins in the quarter had
improved to 3.6%
(http://articles.economictimes.indiatimes.com/2011-07-15/news/2
9778005_1_rights-issue-sbi-chairman-pratip-chaudhuri-state-ban
k). We find it tough to see how NIM would have
expanded 30 bps sequentially on an underlying basis in
1Q – especially given the sharp margin compression
seen at most SOE banks this quarter. But we will wait for
clarity in the earnings report tomorrow.
We maintain our view that full year NIM’s will likely be
pressured by continued increase in funding cost. At the
same time, all assets (bonds) will not reprice given
duration mis-match. If banks raise lending rates
aggressively, then NIM’s can be better than our
estimates but provisioning will then be higher than our
current muted forecasts.
Price Target Discussion
We arrive at our price target of Rs2,000 using a probability
weighted sum of the parts method.
The two components to SBI from a valuation perspective are
the banking and life insurance businesses. We value them on
the following basis:
Consolidated banking business: We value the banking
entities using a three-phase residual income model – a
five-year high growth period, a 10-year maturity period,
followed by a declining period.
Life insurance business: We use an appraised value method.
We add to the embedded value the value of new business to
get a base-case value for the life business of Rs140 per share.
Risks to Our Price Target
Key downside risks to our price target include slower-than-
expected loan growth, sharp compression in NIMs, and
significant deterioration in asset quality (restructured loans
slippage).
Upside risks include: stronger-than-expected fee income and
lower-than-expected credit costs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
State Bank of India
F1Q12 Preview – What Are
We Expecting For Tomorrow
Quick Comment: State Bank of India is due to
announce its quarterly results on August 13, 2011
(Saturday). Reported earnings this quarter are likely to
be volatile. We expect profits of Rs. 27 bn at the parent
level (up from Rs. 0.2 bn in the previous quarter and
down 7% YoY). There are no IBES / Factset estimates
available for quarterly profits but Bloomberg consensus
profit estimate for SBI is much lower at Rs. 20 bn. In our
view, the difference could possibly be due to the
assumption on loan loss charges for the quarter.
Below, we highlight our expectations for the key
variables:
a) NII growth: We are building in headline NII growth of
9% QoQ and 23% YoY. In the previous quarter –
reported margins at 3.07% were suppressed on account
of multiple one-offs. Adjusted margins were closer to
3.25-3.3%. Given the aggressive lending rate increases
by SBI, we expect margins to be supported and remain
broadly stable QoQ – unlike other SOE banks where
NIM’s were down materially.
We highlight that the SBI Chairman in press reports in
mid-July had indicated that margins in the quarter had
improved to 3.6%
(http://articles.economictimes.indiatimes.com/2011-07-15/news/2
9778005_1_rights-issue-sbi-chairman-pratip-chaudhuri-state-ban
k). We find it tough to see how NIM would have
expanded 30 bps sequentially on an underlying basis in
1Q – especially given the sharp margin compression
seen at most SOE banks this quarter. But we will wait for
clarity in the earnings report tomorrow.
We maintain our view that full year NIM’s will likely be
pressured by continued increase in funding cost. At the
same time, all assets (bonds) will not reprice given
duration mis-match. If banks raise lending rates
aggressively, then NIM’s can be better than our
estimates but provisioning will then be higher than our
current muted forecasts.
Price Target Discussion
We arrive at our price target of Rs2,000 using a probability
weighted sum of the parts method.
The two components to SBI from a valuation perspective are
the banking and life insurance businesses. We value them on
the following basis:
Consolidated banking business: We value the banking
entities using a three-phase residual income model – a
five-year high growth period, a 10-year maturity period,
followed by a declining period.
Life insurance business: We use an appraised value method.
We add to the embedded value the value of new business to
get a base-case value for the life business of Rs140 per share.
Risks to Our Price Target
Key downside risks to our price target include slower-than-
expected loan growth, sharp compression in NIMs, and
significant deterioration in asset quality (restructured loans
slippage).
Upside risks include: stronger-than-expected fee income and
lower-than-expected credit costs.
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