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State Bank of India
Meeting snippets: problems continue
Event
Multiple problems: We met with management of State Bank of India (SBI) to
get an update on the company. The key takeaway was that asset quality and
pension issues are unlikely to abate in the near term. Maintain Underperform.
Impact
Asset quality – no way out yet: Management sees headwinds in multiple
sectors across the small- and mid-corporate segments. With the
macroeconomic environment seemingly taking a turn for the worse, a material
decrease in delinquencies in FY12 may not come through. Moreover, the
stress is now becoming broad-based vs previously, when only a few sectors
like textile and gems and jewellery were producing more NPLs. Agri debt
waivers have created a moral hazard in the sector. However, management
sees better agri income from a healthy Kharif crop this season, which should
lead to some improvement in loan recovery. Retail loan asset quality is still
good. Overall slippages are expected to remain relatively high, similar to the
levels seen in 1Q FY12, and we believe any improvement is going to be very
slow and gradual.
Additional pension provisioning from Nov 2012: SBI will begin to provide
an additional Rs17bn of pensions per year from November of next year. This
will take care of pension obligations arising out of the wage revision expected
in the 10th bipartite settlement w.e.f. Nov-12 and are based on preliminary
expectations of a 15% wage hike. This is on top of the Rs20–24bn pension
provisioning the bank does each year anyway.
Confident of maintaining FY12E NIMs above 3.5%: In 2Q12, some benefit
is likely to come from Rs300bn of 1,000-day term deposits being repriced
downward to ~9.25% from the current 10.2–10.8%. Also, because the bank
was late compared with peers in raising rates, the lagged impact of hiking
loan rates should continue in the quarter.
Loan growth likely to be on the lower side of guided 16–18% range:
Growth has indeed slowed in the project lending space, particularly for
infrastructure. Overall demand across sectors has slowed considerably.
No visibility on capital yet. Management has not yet received definite
indications from the government on the capital injection. The capital raising is
likely to be much smaller than the Rs200bn initially planned by the bank. For
FY12E, the bank may receive just enough capital infusion from the
government to maintain Tier I at 8%. Additional capital may be budgeted for
and provided in FY13 by the government.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs1,700.00 based on a sum of parts methodology.
Catalyst: Continued increase in slippages, negative surprises on opex.
Action and recommendation
Premium valuations unwarranted: SBI shares trade at a ~10% premium to
large-cap peers despite the bank having inferior return ratios
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
State Bank of India
Meeting snippets: problems continue
Event
Multiple problems: We met with management of State Bank of India (SBI) to
get an update on the company. The key takeaway was that asset quality and
pension issues are unlikely to abate in the near term. Maintain Underperform.
Impact
Asset quality – no way out yet: Management sees headwinds in multiple
sectors across the small- and mid-corporate segments. With the
macroeconomic environment seemingly taking a turn for the worse, a material
decrease in delinquencies in FY12 may not come through. Moreover, the
stress is now becoming broad-based vs previously, when only a few sectors
like textile and gems and jewellery were producing more NPLs. Agri debt
waivers have created a moral hazard in the sector. However, management
sees better agri income from a healthy Kharif crop this season, which should
lead to some improvement in loan recovery. Retail loan asset quality is still
good. Overall slippages are expected to remain relatively high, similar to the
levels seen in 1Q FY12, and we believe any improvement is going to be very
slow and gradual.
Additional pension provisioning from Nov 2012: SBI will begin to provide
an additional Rs17bn of pensions per year from November of next year. This
will take care of pension obligations arising out of the wage revision expected
in the 10th bipartite settlement w.e.f. Nov-12 and are based on preliminary
expectations of a 15% wage hike. This is on top of the Rs20–24bn pension
provisioning the bank does each year anyway.
Confident of maintaining FY12E NIMs above 3.5%: In 2Q12, some benefit
is likely to come from Rs300bn of 1,000-day term deposits being repriced
downward to ~9.25% from the current 10.2–10.8%. Also, because the bank
was late compared with peers in raising rates, the lagged impact of hiking
loan rates should continue in the quarter.
Loan growth likely to be on the lower side of guided 16–18% range:
Growth has indeed slowed in the project lending space, particularly for
infrastructure. Overall demand across sectors has slowed considerably.
No visibility on capital yet. Management has not yet received definite
indications from the government on the capital injection. The capital raising is
likely to be much smaller than the Rs200bn initially planned by the bank. For
FY12E, the bank may receive just enough capital infusion from the
government to maintain Tier I at 8%. Additional capital may be budgeted for
and provided in FY13 by the government.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs1,700.00 based on a sum of parts methodology.
Catalyst: Continued increase in slippages, negative surprises on opex.
Action and recommendation
Premium valuations unwarranted: SBI shares trade at a ~10% premium to
large-cap peers despite the bank having inferior return ratios
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