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State Bank of India (SBIN)
Banks/Financial Institutions
Focusing on profits. SBI 2QFY12 earnings reflect the underlying pressure to generate
higher profits. Lower fees, treasury gains and higher slippages are the pressure points
while NIMs, stable costs and lower provisions seem to be the few avenues. The bank is
in a dilemma, till it gets comfort on capitalization, as slippages are high and coverage
ratio declines to drive higher earnings. Trends on slippages over the next few quarters
remain the key focus area. Maintain BUY with TP of `2,600 (from `2,750 previously)
factoring earnings revisions.
Navigating a tough quarter with mixed results; maintain BUY
SBI 2QFY12 performance continued to remain a mixed bag. On the positive side: (1) NIM
expanded further. Banks continue to enjoy loan-pricing power in the current environment despite
considerably slower growth. (2) Operating costs are stabilizing and expect improvement in costincome
ratio in 2HFY12E on the back of healthy margins. (3) Regulatory provisions that tampered
profits in the recent quarters are likely behind us. We expect provisions to ease in 2HFY12E and
thereby more accurately reflect the trends in underlying slippages. On the negative side: (1)
Slippages remain high and the bank is likely to make lower provisions in the new regulatory
regime which will pull down current coverage ratio. (2) Higher duration in the AFS portfolio is
likely to drive higher provisions in 2HFY12E. (3) Fee income trends are showing signs of weakness
as the bank takes a cautious approach and/or conserves capital.
We revise earnings in FY2012-14E by 2-10% to reflect higher provisions (MTM and loan-loss) and
lower fee income. We maintain our BUY rating (TP of `2,600 from `2,750) and find valuations
attractive at 0.9X book and 5XFY2013E EPS delivering RoEs (pre-dilution) of about 19% and
earnings growth of 38% CAGR for FY2011-13E. Above-normal trends on slippages for long
period would be the key risk to our call.
NIMs expand 17 bps qoq to 3.8% as focus has shifted to profitable growth
SBI reported another quarter on NIMs with 17 bps qoq increase to 3.8%. SBI has decisively shifted
focus to profitable growth as underlying loan growth is lower than industry average. Domestic
margins have improved 18 bps to 4.1%. Domestic CD ratio is at 76% and further scope for
improvement from current levels looks limited.
We believe that the focus on NIMs will continue for another few quarters as NII is one of the
primary sources to improve profitability as (1) bank has a low Tier-1 capital resulting in slower loan
growth apart from weak macro environment, (2) contribution from investment profits is low as
yields continue to increase qoq and (3) contribution of core fee income is gradually reducing as it is
capital consuming.
Slippages high, lower write-offs sharply increase NPLs; coverage drops
Slippages were high at 4% for the quarter—clearly disappointing as they seem to be fairly
diversified (exclude the one large corporate slippage) as against the previous few quarters
which were restricted to agriculture and SME—driven by the migration exercise. Corporate
slippages were primarily from iron and steel, export-related (gems and jewellery), sugar and
paper. Agriculture and SME continue to witness higher-than-normalized slippages at 7-8%
levels (annualized). Retail slippages are above other banks at 3% levels. The bank is taking
additional measures to de-risk P&L, especially through insurance of its export loans.
Other key financial highlights for the quarter
Cost-income ratio was at 46% as the bank made normalized costs during the quarter.
Overall operating costs are moving to a more predictable environment which we believe is
positive. However, sharp rise in yields over the past two quarters would imply higher
provisions for retirement costs—full provisions which could be made in 4QFY12E.
Non-interest income declined 14% yoy on the back of weak core fee income growth and
substantially lower contribution from treasury business. Treasury income was `0.3 bn
(decline of 86% yoy). Fee income growth declined 12% yoy to `26 bn as the benefit
from select large corporate fee income was not available while the bank is taking a
cautious approach with respect to certain off-balance sheet items that generate higher
fee income. We are building fee income growth to decline 5% in FY2012E due to
marginal shift in the business undertaken by the bank.
Consolidated earnings (before minority interest) increased 45% yoy to `35 bn (State Bank
of Indore which reported large losses in 2QFY11 as a part of the consolidation of
business). The current quarter includes the business of State Bank of India Commercial
and International Bank. Consolidated NII grew 21% yoy to `138 bn. SBI Life reported a
profit of `0.6 bn while SBI Capital Markets posted a profit of `387 mn.
Tier-1 capital is at 7.5% with overall CAR at 11.4%. Overall capital adequacy ratio has
come under a bit of pressure post the charge taken on pension provision through reserves
in March 2011. The bank is looking to expedite the process of capital raising (rights/
preferential issue and expects full participation from GoI) though near-term capital
requirements will be funded through Tier-2 bonds and marginal shift in the composition
of loans. We note that the bank has taken insurance cover (ECGC) for certain exportrelated
loans which would be fully reflected in the next quarter results.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
State Bank of India (SBIN)
Banks/Financial Institutions
Focusing on profits. SBI 2QFY12 earnings reflect the underlying pressure to generate
higher profits. Lower fees, treasury gains and higher slippages are the pressure points
while NIMs, stable costs and lower provisions seem to be the few avenues. The bank is
in a dilemma, till it gets comfort on capitalization, as slippages are high and coverage
ratio declines to drive higher earnings. Trends on slippages over the next few quarters
remain the key focus area. Maintain BUY with TP of `2,600 (from `2,750 previously)
factoring earnings revisions.
Navigating a tough quarter with mixed results; maintain BUY
SBI 2QFY12 performance continued to remain a mixed bag. On the positive side: (1) NIM
expanded further. Banks continue to enjoy loan-pricing power in the current environment despite
considerably slower growth. (2) Operating costs are stabilizing and expect improvement in costincome
ratio in 2HFY12E on the back of healthy margins. (3) Regulatory provisions that tampered
profits in the recent quarters are likely behind us. We expect provisions to ease in 2HFY12E and
thereby more accurately reflect the trends in underlying slippages. On the negative side: (1)
Slippages remain high and the bank is likely to make lower provisions in the new regulatory
regime which will pull down current coverage ratio. (2) Higher duration in the AFS portfolio is
likely to drive higher provisions in 2HFY12E. (3) Fee income trends are showing signs of weakness
as the bank takes a cautious approach and/or conserves capital.
We revise earnings in FY2012-14E by 2-10% to reflect higher provisions (MTM and loan-loss) and
lower fee income. We maintain our BUY rating (TP of `2,600 from `2,750) and find valuations
attractive at 0.9X book and 5XFY2013E EPS delivering RoEs (pre-dilution) of about 19% and
earnings growth of 38% CAGR for FY2011-13E. Above-normal trends on slippages for long
period would be the key risk to our call.
NIMs expand 17 bps qoq to 3.8% as focus has shifted to profitable growth
SBI reported another quarter on NIMs with 17 bps qoq increase to 3.8%. SBI has decisively shifted
focus to profitable growth as underlying loan growth is lower than industry average. Domestic
margins have improved 18 bps to 4.1%. Domestic CD ratio is at 76% and further scope for
improvement from current levels looks limited.
We believe that the focus on NIMs will continue for another few quarters as NII is one of the
primary sources to improve profitability as (1) bank has a low Tier-1 capital resulting in slower loan
growth apart from weak macro environment, (2) contribution from investment profits is low as
yields continue to increase qoq and (3) contribution of core fee income is gradually reducing as it is
capital consuming.
Slippages high, lower write-offs sharply increase NPLs; coverage drops
Slippages were high at 4% for the quarter—clearly disappointing as they seem to be fairly
diversified (exclude the one large corporate slippage) as against the previous few quarters
which were restricted to agriculture and SME—driven by the migration exercise. Corporate
slippages were primarily from iron and steel, export-related (gems and jewellery), sugar and
paper. Agriculture and SME continue to witness higher-than-normalized slippages at 7-8%
levels (annualized). Retail slippages are above other banks at 3% levels. The bank is taking
additional measures to de-risk P&L, especially through insurance of its export loans.
Other key financial highlights for the quarter
Cost-income ratio was at 46% as the bank made normalized costs during the quarter.
Overall operating costs are moving to a more predictable environment which we believe is
positive. However, sharp rise in yields over the past two quarters would imply higher
provisions for retirement costs—full provisions which could be made in 4QFY12E.
Non-interest income declined 14% yoy on the back of weak core fee income growth and
substantially lower contribution from treasury business. Treasury income was `0.3 bn
(decline of 86% yoy). Fee income growth declined 12% yoy to `26 bn as the benefit
from select large corporate fee income was not available while the bank is taking a
cautious approach with respect to certain off-balance sheet items that generate higher
fee income. We are building fee income growth to decline 5% in FY2012E due to
marginal shift in the business undertaken by the bank.
Consolidated earnings (before minority interest) increased 45% yoy to `35 bn (State Bank
of Indore which reported large losses in 2QFY11 as a part of the consolidation of
business). The current quarter includes the business of State Bank of India Commercial
and International Bank. Consolidated NII grew 21% yoy to `138 bn. SBI Life reported a
profit of `0.6 bn while SBI Capital Markets posted a profit of `387 mn.
Tier-1 capital is at 7.5% with overall CAR at 11.4%. Overall capital adequacy ratio has
come under a bit of pressure post the charge taken on pension provision through reserves
in March 2011. The bank is looking to expedite the process of capital raising (rights/
preferential issue and expects full participation from GoI) though near-term capital
requirements will be funded through Tier-2 bonds and marginal shift in the composition
of loans. We note that the bank has taken insurance cover (ECGC) for certain exportrelated
loans which would be fully reflected in the next quarter results.
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