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We hosted the SBI Chairman and senior management on a conference call
on Tuesday. We see new management taking concrete steps to improve
long-term profitability, but near-term asset quality remains challenging.
We retain our OW due to the attractive valuations, though the negative
news flow on asset quality is likely to continue in the medium term.
Addressing capital stresses. The management is addressing the low T1
ratio on multiple fronts: a) the rights issue remains on the table b) trying
to reduce the RWA/loans ratio (108%, FY11) by opting for credit
guarantees and cleaning up undisbursed sanctions. It aims for a 70-75
bps accretion to T1 CAR by managing the RWA/loans ratio.
Asset quality – no quickfix solutions. The management is addressing
its weak asset quality (vs peers) with several long-term initiatives:
decentralising processing, reworking sales processes and holding
branches accountable for NPLs. Our sense, however is that the near term
will remain challenged: the next 2-3 quarters should see elevated gross
delinquencies, which may be somewhat offset by improved recoveries.
Operating outlook positive. The management re-iterated the positive
momentum on margins and the likelihood of surpassing its previouslystated
3.5% target. Wage cost pressures are also appear to be under
control, with net staff additions expected to slow. We detected a strong
profitability-focus of the management team, which should start to yield
results in the medium term.
Near-term challenged, but valuations undemanding. SBI could face
continued asset quality issues in the near term. However, a combination
of attractive valuations and enhanced profitability focus drives our
overweight rating and return ratios.
Active capital Management:
SBI did recognize the need to augment capital levels but according to the
management a rights issue very much remains a near term consideration. In the mean
time, management is considering various measures to use capital more efficiently
that could help conserve 70-75bps of tier-1 capital if fully implemented.
ECGC guarantee for export credit: Currently, SBI does not take ECGC
guarantee for its export credit, a practice which it had stopped in 2002. SBI
intends to move Rs300bn of its export credit book under ECGC and given lower
risk weights for lending with ECGC guarantee, this move aid SBI in conserving
capital. Earlier under the PLR regime, banks were not able to pass on the ECGC
premium of ~1.0% to customers. With the base rate regime, banks can now pass
on some part of the ECGC premium. Also given higher delinquencies in the
export segment (gems/textiles/leather), claims on ECGC guarantee would also
compensate for the guarantee charges.
State guarantee for SME lending: Similar to export guarantee scheme
mentioned above, states provide guarantee for SME lending
intends to increase the portfolio under such guarantee to Rs120bn from Rs60bn
currently.
Term loans - capital only on drawn limits: With better IT infrastructure, SBI is
able to get better data on project loans. Instead of providing capital on full
sanction amount, the bank is able to delineate and provide capital only on
disbursed sanctions.
Data on ratings: In a few cases, system was not able to capture complete rating
details of corporates and risk weightages were thus applied as unrated for such
companies. SBI is streamlining this process and with ratings data, SBI expects
reduction in risk weightages in such cases.
We believe capital infusion is a must given low tier-1 capital level of 7.6% but the
recent ratings downgrade could front end the process. Also, the above mentioned
steps would improve capital efficiency and address some concerns. Recent news
flows on Rs30-45bn (30-50bps tier-1) of interim capital infusion by the government
would aid capital levels till a firm decision is taken on the rights issue.
Asset quality - Near term pain to continue
Incremental delinquency levels are coming off but with the overall economic
slowdown, management expects slippages from the restructured portfolio to inch up.
We believe that there is some near term pain and management’s initiatives would
take 12-18mnts to reflect in asset quality.
Delinquencies from restructured book to inch up: With the overall slowdown,
management expects slippages to inch up from the current trend rate of Rs6-0-
6.5bn per qtr. Higher rates and overall slowdown is impacting corporates but
management did mention that rupee depreciation is aiding export oriented
companies at the margin.
Agriculture asset quality: Agri NPAs have inched significantly for most PSUs
and management agreed that credit behavior has been impacted after the 2008-09
loan waivers. Central and state government interest subvention has made new
Agri credit very cheap at ~4% and the bank is using this as an incentive to push
farmers to pay their old dues. Agri gold lending is also picking up and being
secured credit, this should aid in improving the overall Agri asset quality, though
share of gold loans still remain relatively small.
Retail and small ticket corporate loans collections and credit follow up
decentralized again: SBI had centralized collection and credit follow-up but
SBI had difficulty in centralized recovery for small ticket loans. They have
decentralized the recovery process again and management is seeing improving
collections after follow up and recovery responsibility has been moved back to
branches/hubs.
Increasing branch accountability for NPAs: SBI has started to penalize
branches for delinquencies. This initiative has brought in more accountability of
the branch manager /field officer in credit appraisal v/s just being just asset
originators earlier.
Margins expected to remain robust
Margins did surprise for SBI in 1Q12 and management expects margins to remain
robust in the near term. Repricing of the high costs 100 day deposits and dual rate
loans would continue to NIMs would be nominal and it would be more than offset
due to lower credit costs/ claims from ECGC guarantees.
Cost/employee efficiency:
SBI's employee efficiency is relatively lower than peers but according to the
management, that is a result of recruitments over the last 3 yrs. SBI has added ~45K
employees in the last 3 yrs v/s flat staff strength for most other PSU banks and that
has led to the lower employee efficiency. Management believes that the hiring done
in the last 3 yrs is not fully reflected in the business being generated and should start
reflecting over the next 2-3 yrs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We hosted the SBI Chairman and senior management on a conference call
on Tuesday. We see new management taking concrete steps to improve
long-term profitability, but near-term asset quality remains challenging.
We retain our OW due to the attractive valuations, though the negative
news flow on asset quality is likely to continue in the medium term.
Addressing capital stresses. The management is addressing the low T1
ratio on multiple fronts: a) the rights issue remains on the table b) trying
to reduce the RWA/loans ratio (108%, FY11) by opting for credit
guarantees and cleaning up undisbursed sanctions. It aims for a 70-75
bps accretion to T1 CAR by managing the RWA/loans ratio.
Asset quality – no quickfix solutions. The management is addressing
its weak asset quality (vs peers) with several long-term initiatives:
decentralising processing, reworking sales processes and holding
branches accountable for NPLs. Our sense, however is that the near term
will remain challenged: the next 2-3 quarters should see elevated gross
delinquencies, which may be somewhat offset by improved recoveries.
Operating outlook positive. The management re-iterated the positive
momentum on margins and the likelihood of surpassing its previouslystated
3.5% target. Wage cost pressures are also appear to be under
control, with net staff additions expected to slow. We detected a strong
profitability-focus of the management team, which should start to yield
results in the medium term.
Near-term challenged, but valuations undemanding. SBI could face
continued asset quality issues in the near term. However, a combination
of attractive valuations and enhanced profitability focus drives our
overweight rating and return ratios.
Active capital Management:
SBI did recognize the need to augment capital levels but according to the
management a rights issue very much remains a near term consideration. In the mean
time, management is considering various measures to use capital more efficiently
that could help conserve 70-75bps of tier-1 capital if fully implemented.
ECGC guarantee for export credit: Currently, SBI does not take ECGC
guarantee for its export credit, a practice which it had stopped in 2002. SBI
intends to move Rs300bn of its export credit book under ECGC and given lower
risk weights for lending with ECGC guarantee, this move aid SBI in conserving
capital. Earlier under the PLR regime, banks were not able to pass on the ECGC
premium of ~1.0% to customers. With the base rate regime, banks can now pass
on some part of the ECGC premium. Also given higher delinquencies in the
export segment (gems/textiles/leather), claims on ECGC guarantee would also
compensate for the guarantee charges.
State guarantee for SME lending: Similar to export guarantee scheme
mentioned above, states provide guarantee for SME lending
intends to increase the portfolio under such guarantee to Rs120bn from Rs60bn
currently.
Term loans - capital only on drawn limits: With better IT infrastructure, SBI is
able to get better data on project loans. Instead of providing capital on full
sanction amount, the bank is able to delineate and provide capital only on
disbursed sanctions.
Data on ratings: In a few cases, system was not able to capture complete rating
details of corporates and risk weightages were thus applied as unrated for such
companies. SBI is streamlining this process and with ratings data, SBI expects
reduction in risk weightages in such cases.
We believe capital infusion is a must given low tier-1 capital level of 7.6% but the
recent ratings downgrade could front end the process. Also, the above mentioned
steps would improve capital efficiency and address some concerns. Recent news
flows on Rs30-45bn (30-50bps tier-1) of interim capital infusion by the government
would aid capital levels till a firm decision is taken on the rights issue.
Asset quality - Near term pain to continue
Incremental delinquency levels are coming off but with the overall economic
slowdown, management expects slippages from the restructured portfolio to inch up.
We believe that there is some near term pain and management’s initiatives would
take 12-18mnts to reflect in asset quality.
Delinquencies from restructured book to inch up: With the overall slowdown,
management expects slippages to inch up from the current trend rate of Rs6-0-
6.5bn per qtr. Higher rates and overall slowdown is impacting corporates but
management did mention that rupee depreciation is aiding export oriented
companies at the margin.
Agriculture asset quality: Agri NPAs have inched significantly for most PSUs
and management agreed that credit behavior has been impacted after the 2008-09
loan waivers. Central and state government interest subvention has made new
Agri credit very cheap at ~4% and the bank is using this as an incentive to push
farmers to pay their old dues. Agri gold lending is also picking up and being
secured credit, this should aid in improving the overall Agri asset quality, though
share of gold loans still remain relatively small.
Retail and small ticket corporate loans collections and credit follow up
decentralized again: SBI had centralized collection and credit follow-up but
SBI had difficulty in centralized recovery for small ticket loans. They have
decentralized the recovery process again and management is seeing improving
collections after follow up and recovery responsibility has been moved back to
branches/hubs.
Increasing branch accountability for NPAs: SBI has started to penalize
branches for delinquencies. This initiative has brought in more accountability of
the branch manager /field officer in credit appraisal v/s just being just asset
originators earlier.
Margins expected to remain robust
Margins did surprise for SBI in 1Q12 and management expects margins to remain
robust in the near term. Repricing of the high costs 100 day deposits and dual rate
loans would continue to NIMs would be nominal and it would be more than offset
due to lower credit costs/ claims from ECGC guarantees.
Cost/employee efficiency:
SBI's employee efficiency is relatively lower than peers but according to the
management, that is a result of recruitments over the last 3 yrs. SBI has added ~45K
employees in the last 3 yrs v/s flat staff strength for most other PSU banks and that
has led to the lower employee efficiency. Management believes that the hiring done
in the last 3 yrs is not fully reflected in the business being generated and should start
reflecting over the next 2-3 yrs.
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