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Still in the woods
SBI’s net profit for 1QFY12 at Rs15.8bn (down 46% YoY) was below
expectations largely due to high investment provision and tax rate. The
key positive in the result was the 44bps YoY expansion in margins driven
by recent hike in lending rate, which reflects on shift in bank’s focus on
profitability, and strong liability franchise. Asset quality continues to raise
concerns and even though the bank is committed to improving asset
quality, slippages from the aggressive lending in the past may result in
delinquencies being high for next 2-3 quarters. Maintain U-PF.
Margin expansion reflects on the focus towards profitability
SBI’s 44bps YoY expansion in margins to 3.6% has been one of the best
trends in the sector and reflects on shift in focus towards profitability, rather
than merely market share gain; the QoQ expansion of 55bps is partly due to
a low base. Loan growth of 19% and margin expansion supported a strong
topline growth of 33%, but total income grew at slower pace due to slower
fee growth and lower treasury gains. In 5MFY12 SBI has raised lending rates
by 175bps (much more than increase in term deposit rates) and discontinued
some aggressive loan products in order to defend margin pressures. Rate
hikes have also been supported by a healthy growth in CASA deposits (up
19% YoY) that has enabled SBI to sustain among the highest CASA ratio of
48%. Focus on profitable lending and healthy CASA ratio would enable SBI to
be among the few banks to report margin expansion in FY12.
Asset quality pressure remains high
SBI continues to face high asset quality pressures with delinquency ratio
reaching 3.8% of past year’s loans, worse than 4Q levels. Delinquencies were
largely driven by corporate loans and slippages from restructured loans. As a
result gross NPA grew by 10% QoQ, but NPA growth was low at 1% QoQ due
to increase in provisions towards RBI’s new norms. Bank is committed to
recoveries and improving underwriting standards and employee accountability
on new lending, but we believe that slippages from aggressive lending in the
past along with slowdown in economic environment and high interest rate will
result in higher asset quality pressures in the coming 2-3 quarters.
Maintain U-PF
We see a strong 32% Cagr in earnings over FY11-14, but partly due to a low
base of FY11. Tier I CAR is low at 7.6% and SBI will need to fresh capital
infusion- likely in 2H. ROA is low (FY12CL at 1%) and the upcoming capital
raising could dilute ROE. We reiterate our U-PF recommendation on the stock
due to concerns on asset quality and lower than peer profitability. Our target
price of Rs2,400 is based on 1.5x FY13 adjusted consolidated PB.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Still in the woods
SBI’s net profit for 1QFY12 at Rs15.8bn (down 46% YoY) was below
expectations largely due to high investment provision and tax rate. The
key positive in the result was the 44bps YoY expansion in margins driven
by recent hike in lending rate, which reflects on shift in bank’s focus on
profitability, and strong liability franchise. Asset quality continues to raise
concerns and even though the bank is committed to improving asset
quality, slippages from the aggressive lending in the past may result in
delinquencies being high for next 2-3 quarters. Maintain U-PF.
Margin expansion reflects on the focus towards profitability
SBI’s 44bps YoY expansion in margins to 3.6% has been one of the best
trends in the sector and reflects on shift in focus towards profitability, rather
than merely market share gain; the QoQ expansion of 55bps is partly due to
a low base. Loan growth of 19% and margin expansion supported a strong
topline growth of 33%, but total income grew at slower pace due to slower
fee growth and lower treasury gains. In 5MFY12 SBI has raised lending rates
by 175bps (much more than increase in term deposit rates) and discontinued
some aggressive loan products in order to defend margin pressures. Rate
hikes have also been supported by a healthy growth in CASA deposits (up
19% YoY) that has enabled SBI to sustain among the highest CASA ratio of
48%. Focus on profitable lending and healthy CASA ratio would enable SBI to
be among the few banks to report margin expansion in FY12.
Asset quality pressure remains high
SBI continues to face high asset quality pressures with delinquency ratio
reaching 3.8% of past year’s loans, worse than 4Q levels. Delinquencies were
largely driven by corporate loans and slippages from restructured loans. As a
result gross NPA grew by 10% QoQ, but NPA growth was low at 1% QoQ due
to increase in provisions towards RBI’s new norms. Bank is committed to
recoveries and improving underwriting standards and employee accountability
on new lending, but we believe that slippages from aggressive lending in the
past along with slowdown in economic environment and high interest rate will
result in higher asset quality pressures in the coming 2-3 quarters.
Maintain U-PF
We see a strong 32% Cagr in earnings over FY11-14, but partly due to a low
base of FY11. Tier I CAR is low at 7.6% and SBI will need to fresh capital
infusion- likely in 2H. ROA is low (FY12CL at 1%) and the upcoming capital
raising could dilute ROE. We reiterate our U-PF recommendation on the stock
due to concerns on asset quality and lower than peer profitability. Our target
price of Rs2,400 is based on 1.5x FY13 adjusted consolidated PB.
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