State Bank of India – Walking the talk ::RBS

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SBI's 1QFY12 operating performance and likely sustainability of the earnings momentum has
renewed investors' faith. The delinquency trend remains a concern even though
recoveries/upgrades are gaining traction. We think the core profitability momentum will likely
cushion much of the asset quality pain. Buy


1QFY12: Strong operating performance; statutory and MTM provisions pull down PAT
SBI reported a 55 bps qoq improvement in net interest margin to 3.62% in 1QFY12 (Chart 1).
Going forward, management expects to maintain margins around current levels (3.5% in FY12F)
partly aided by the lower reliance on bulk deposits (domestic CASA at about 48%; Chart 3). Core
fee income grew 9% yoy partly due to lower growth in corporate fee income segment. However,
the bank had to make provisions to meet statutory norms (provision coverage, increase in slab
rates for NPL provisioning and standard provision on restructured loans) and mark to market
(MTM) on investment book, which dented net profit in 1QFY12.
NIMs could surprise positively in FY12 given the strong CASA momentum
The savings banks’ deposits grew by 21% yoy in 1QFY12 (grew 26% yoy in FY11, 29% yoy in
FY10). SBI seems to be gaining market share in the savings deposit market, which is a long-term
structural positive for the core business (Table 3). Given SBI’s strong liability franchise, the NIMs
for the domestic business improved by 45bp yoy to 3.9% in 1QFY12 and are now comparable to
the best in class. ie, HDFC Bank (4.2%).
Delinquency remains high, but recoveries and upgrades are gaining traction
Delinquency trend (about 90bp of loans on a one-year-lag basis) remains high (Chart 4) and
provides discomfort. However, the recoveries and upgrades have started to gain traction (about
50bp of loans on a one-year-lag basis; Table 4). This partially provides comfort despite the
higher-than-peers delinquency ratio. Management guided to bring down net NPLs to a level of
1.5% by March 2012 (1.6% as of June 2011; Chart 5).
Cut in FY12F earnings, equity dilution likely in FY11; maintain Buy, TP down to Rs2,774
We cut net profit about 7% for FY12F and by 2-3% for FY13-14F, largely due to the cut in core
fee income estimate and MTM provision on the investment book in 1QFY12. Our valuation for
SBI (including associate banks) is thus down to Rs2,684 (from Rs2,907). This leads to a cut in
our SOTP-based target price to Rs2,774 (from Rs2,997). At our TP, SBI (and associate banks)
would trade at 1.8x FY12F book value and 10.7x FY12F earnings.