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Action: Initiate coverage with a Buy and a TP of INR2,400
It can only get better for SBI from now, in our view. We believe higher loan
losses, slowing loan growth and a lack of capital are all priced in. SBI is
the proxy for the Indian banking sector and is the most attractive lever for
playing the impending turn in the rate cycle, in our view. We initiate
coverage with a Buy rating.
Factoring in stress case LLPs of 145bps for FY12F (six-year average
LLP of 66 bps)
We are factoring in incremental slippage of 2.6-2.8%, compared with an
average of 2.1% over the past eight quarters. We are forecasting LLPs of
145bps for FY12F, from 127bps in FY11 (six-year average of 66 bps) to
account for possible slippages from power sector exposure and a general
deterioration in asset quality.
NIM should be stable on strong CASA growth
SBI's consistently strong CASA growth of around 23% over the past nine
quarters and its improving CASA per branch should help maintain an
average NIM of 3.4% over FY12F-13F. We are building a capital infusion
of INR50bn in 4QFY12F from the government and see sustainable loan
growth of 16% for FY12F and 18% for FY13F.
Valuation/catalyst: trades at 1.1x FY13F ABV, ROE of 17.1%
SBI trades at 1.1x FY13F ABV, one standard deviation below its historical
mean of 1.7x one-year forward ABV. At our TP of INR2,400, SBI trades at
1.55x FY13F ABV of INR1,299 and 9.7x FY13F EPS of INR209.67 for an
FY13F ROA of 0.9% and adjusted ROE of 17.1%. Rate cycle turns, capital
infusion and infra-policy action are potential catalysts.
Valuation
Initiate with Buy; TP of INR2,400
We estimate SBI’s loan book to have a CAGR of 17% over FY12-14F. We expect this to
drive a revenue and PAT CAGR of 20% and 37.7%, respectively, over this period after
factoring in an average margin of 3.5%. We expect SBI to record ROA and adjusted
ROE of 0.93% and 17.1%, respectively for FY13F. SBI currently trades at 1.1 FY13F
ABV, one standard deviation below its historical mean of 1.7 one-year forward ABV. At
our TP of 2400, the implied P/ABV of the core bank for FY13F is 1.6x. We arrive at our
target price of INR2,400 by calculating a subsidiary value of INR375 per share and
adding INR2025 per share for the core bank business based on a three-stage residualincome
valuation method on the following assumptions:
• We estimate FY12F and FY13F loan book growth of 16% and 18%, respectively, and
we forecast fee income to grow at 16% in FY12F and by 20% in FY13F.
• We estimate NIM to average at 3.47% for FY12F and FY13F, respectively, from 3.6%
for 1QFY12.
• We are building in a GNPL ratio of 3.98% for FY12F and 4.63% for FY13F, compared
with 3.53% in 1QFY12. We expect the NNPL ratio to be 1.52% for FY12F and 1.73%
for FY13F, backed by a provision cover of 72% (including technical write-offs) for
FY12F.
• As of 1QFY12, SBI had a capital adequacy ratio of 11.6% with about 7.6% in tier-1. We
are building in a capital infusion of INR50bn in 4QFY12F.
• We are factoring in a cost-income ratio of 46.2% in FY13F, up from 47.6% in F11. We
expect a cost-asset ratio of 2.09% for FY13F vs. 2.02% in FY11.
• We expect a pro forma diluted EPS of INR145.29 for FY12F and INR209.67 for FY13F.
At 1.1x our FY13F ABV of INR1,299 and 7x our FY13F diluted EPS, we believe the
current valuation looks very attractive. Our target price of INR2,400 implies 1.5x our
FY13F adjusted BV (adjusted ROE of 17.1% for FY13F) and 9.7x our FY13F EPS.
Subsidiary valuation
We are using SOTP (sum of the parts) to value all the subsidiaries (for details check
figure below). The valuation for the subsidiaries works out to INR375 per share of SBI.
We are imputing INR250 for all the six banking subsidiaries (derived from 1x ABV and
then applying a 20% discount) and INR76 to the life insurance business, which is derived
from a NBAP margin of 10% and a MV/NBAP multiple of 12x.
Key catalysts: Accelerated monetary policy easing, policy intervention to resolve power
sector bottlenecks like fuel availability, and SEB (state electricity board) financial health
are the key upside catalysts.
Key risks: RBI persisting with a tight monetary policy, policy logjam with respect to
power sector bottlenecks and continued global macro uncertainty.
Residual income valuation
We have built in the following assumptions into our three-stage residual-income model:
• We expect SBI to post a 16.8% CAGR for its average interest-earning assets over
FY11-14F, followed by a CAGR of 11.3% in FY14F-20F and a terminal growth rate of
4% beyond that.
• We have modelled for average ROE of 16.3% over FY12F-20F and a 14.3% terminal
value ROE. Our discount rates range from 15.45% (current cost of equity) for FY12F-
14F, 13% for FY15F-20F and 10% terminal rate.
• We are factoring in a capital infusion of INR50bn in 4QFY12F.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Action: Initiate coverage with a Buy and a TP of INR2,400
It can only get better for SBI from now, in our view. We believe higher loan
losses, slowing loan growth and a lack of capital are all priced in. SBI is
the proxy for the Indian banking sector and is the most attractive lever for
playing the impending turn in the rate cycle, in our view. We initiate
coverage with a Buy rating.
Factoring in stress case LLPs of 145bps for FY12F (six-year average
LLP of 66 bps)
We are factoring in incremental slippage of 2.6-2.8%, compared with an
average of 2.1% over the past eight quarters. We are forecasting LLPs of
145bps for FY12F, from 127bps in FY11 (six-year average of 66 bps) to
account for possible slippages from power sector exposure and a general
deterioration in asset quality.
NIM should be stable on strong CASA growth
SBI's consistently strong CASA growth of around 23% over the past nine
quarters and its improving CASA per branch should help maintain an
average NIM of 3.4% over FY12F-13F. We are building a capital infusion
of INR50bn in 4QFY12F from the government and see sustainable loan
growth of 16% for FY12F and 18% for FY13F.
Valuation/catalyst: trades at 1.1x FY13F ABV, ROE of 17.1%
SBI trades at 1.1x FY13F ABV, one standard deviation below its historical
mean of 1.7x one-year forward ABV. At our TP of INR2,400, SBI trades at
1.55x FY13F ABV of INR1,299 and 9.7x FY13F EPS of INR209.67 for an
FY13F ROA of 0.9% and adjusted ROE of 17.1%. Rate cycle turns, capital
infusion and infra-policy action are potential catalysts.
Valuation
Initiate with Buy; TP of INR2,400
We estimate SBI’s loan book to have a CAGR of 17% over FY12-14F. We expect this to
drive a revenue and PAT CAGR of 20% and 37.7%, respectively, over this period after
factoring in an average margin of 3.5%. We expect SBI to record ROA and adjusted
ROE of 0.93% and 17.1%, respectively for FY13F. SBI currently trades at 1.1 FY13F
ABV, one standard deviation below its historical mean of 1.7 one-year forward ABV. At
our TP of 2400, the implied P/ABV of the core bank for FY13F is 1.6x. We arrive at our
target price of INR2,400 by calculating a subsidiary value of INR375 per share and
adding INR2025 per share for the core bank business based on a three-stage residualincome
valuation method on the following assumptions:
• We estimate FY12F and FY13F loan book growth of 16% and 18%, respectively, and
we forecast fee income to grow at 16% in FY12F and by 20% in FY13F.
• We estimate NIM to average at 3.47% for FY12F and FY13F, respectively, from 3.6%
for 1QFY12.
• We are building in a GNPL ratio of 3.98% for FY12F and 4.63% for FY13F, compared
with 3.53% in 1QFY12. We expect the NNPL ratio to be 1.52% for FY12F and 1.73%
for FY13F, backed by a provision cover of 72% (including technical write-offs) for
FY12F.
• As of 1QFY12, SBI had a capital adequacy ratio of 11.6% with about 7.6% in tier-1. We
are building in a capital infusion of INR50bn in 4QFY12F.
• We are factoring in a cost-income ratio of 46.2% in FY13F, up from 47.6% in F11. We
expect a cost-asset ratio of 2.09% for FY13F vs. 2.02% in FY11.
• We expect a pro forma diluted EPS of INR145.29 for FY12F and INR209.67 for FY13F.
At 1.1x our FY13F ABV of INR1,299 and 7x our FY13F diluted EPS, we believe the
current valuation looks very attractive. Our target price of INR2,400 implies 1.5x our
FY13F adjusted BV (adjusted ROE of 17.1% for FY13F) and 9.7x our FY13F EPS.
Subsidiary valuation
We are using SOTP (sum of the parts) to value all the subsidiaries (for details check
figure below). The valuation for the subsidiaries works out to INR375 per share of SBI.
We are imputing INR250 for all the six banking subsidiaries (derived from 1x ABV and
then applying a 20% discount) and INR76 to the life insurance business, which is derived
from a NBAP margin of 10% and a MV/NBAP multiple of 12x.
Key catalysts: Accelerated monetary policy easing, policy intervention to resolve power
sector bottlenecks like fuel availability, and SEB (state electricity board) financial health
are the key upside catalysts.
Key risks: RBI persisting with a tight monetary policy, policy logjam with respect to
power sector bottlenecks and continued global macro uncertainty.
Residual income valuation
We have built in the following assumptions into our three-stage residual-income model:
• We expect SBI to post a 16.8% CAGR for its average interest-earning assets over
FY11-14F, followed by a CAGR of 11.3% in FY14F-20F and a terminal growth rate of
4% beyond that.
• We have modelled for average ROE of 16.3% over FY12F-20F and a 14.3% terminal
value ROE. Our discount rates range from 15.45% (current cost of equity) for FY12F-
14F, 13% for FY15F-20F and 10% terminal rate.
• We are factoring in a capital infusion of INR50bn in 4QFY12F.
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