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State Bank of India (SBIN)
Banks/Financial Institutions
Lower slippages despite economic down-cycle. Our recent interaction with the
management indicates that SBI’s slippages will likely decline due to significant
strengthening of its monitoring systems even as the economic cycle trends otherwise.
However, overall revenue growth is likely to be subdued despite healthy NIM as loan
growth and fees remain weak. We expect the bank to raise capital by 4QFY12E though
the quantum is not yet clear. Stability in slippages will be the key stock driver over the
next few quarters, in our view. Maintain BUY with TP of `2,300 from `2,600.
Slippages to remain above normal though pace is likely to decelerate from current levels
SBI’s recent initiatives in HR and technology are likely to result in decline in slippages and reduce
the incidence of NPLs from extraneous factors such as the migration exercise, incomplete
documentation etc. The bank is comfortable with the early warning signals that are in place across
most product verticals and branches. In the near term, we expect a healthy harvest season to
reduce slippages and improve recovery in this portfolio. However, weak macro environment will
keep slippages at higher-than-average levels. We expect slippages at 2.8% levels and loan-loss
provisions at 1.4% levels for FY2011-13E.
Subdued revenue outlook on the back of lower fee and loan growth; NIM outlook comfortable
We expect revenue growth to remain subdued at 13% CAGR for FY2011-13E as loan growth is
likely to be below industry average while fee and forex income will remain weak. Weak macro,
focus on slippages over growth and capital conservation is likely to moderate loan growth. We
expect muted fee income performance but contribution from treasury to increase on the back of
decline in interest rates in FY2013E. RBI’s move to curb foreign exchange activities is likely to
impact forex income from the next quarter.
Discussion continues on capital infusion; we don’t see an immediate requirement
The bank is in active dialogue with the GoI for capital and expects the exercise to be completed by
4QFY12. The timing, quantum and nature of infusion are yet to be finalized. Tier-1 is at 7.5% with
overall capital adequacy ratio at 11.4% for 2QFY12 but this excludes 1HFY12 profits.
We believe that SBI does not have any immediate requirement for capital. (1) Growth has
definitely slowed over the past few quarters and we are building 14% CAGR for FY2011-13E, (2)
Internal accruals are reasonably strong with RoEs (pre-dilution) at 17% levels and payout ratios of
20%—reasonably sufficient for underlying loan growth trends, (3) management shifting focus on
capital conservation through loan guarantees and is likely to release capital, especially in segments
like export and SME credit. However, some of these benefits are likely to be countered by
deterioration in ratings of its loan portfolio resulting in increase of risk-weighted assets.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
State Bank of India (SBIN)
Banks/Financial Institutions
Lower slippages despite economic down-cycle. Our recent interaction with the
management indicates that SBI’s slippages will likely decline due to significant
strengthening of its monitoring systems even as the economic cycle trends otherwise.
However, overall revenue growth is likely to be subdued despite healthy NIM as loan
growth and fees remain weak. We expect the bank to raise capital by 4QFY12E though
the quantum is not yet clear. Stability in slippages will be the key stock driver over the
next few quarters, in our view. Maintain BUY with TP of `2,300 from `2,600.
Slippages to remain above normal though pace is likely to decelerate from current levels
SBI’s recent initiatives in HR and technology are likely to result in decline in slippages and reduce
the incidence of NPLs from extraneous factors such as the migration exercise, incomplete
documentation etc. The bank is comfortable with the early warning signals that are in place across
most product verticals and branches. In the near term, we expect a healthy harvest season to
reduce slippages and improve recovery in this portfolio. However, weak macro environment will
keep slippages at higher-than-average levels. We expect slippages at 2.8% levels and loan-loss
provisions at 1.4% levels for FY2011-13E.
Subdued revenue outlook on the back of lower fee and loan growth; NIM outlook comfortable
We expect revenue growth to remain subdued at 13% CAGR for FY2011-13E as loan growth is
likely to be below industry average while fee and forex income will remain weak. Weak macro,
focus on slippages over growth and capital conservation is likely to moderate loan growth. We
expect muted fee income performance but contribution from treasury to increase on the back of
decline in interest rates in FY2013E. RBI’s move to curb foreign exchange activities is likely to
impact forex income from the next quarter.
Discussion continues on capital infusion; we don’t see an immediate requirement
The bank is in active dialogue with the GoI for capital and expects the exercise to be completed by
4QFY12. The timing, quantum and nature of infusion are yet to be finalized. Tier-1 is at 7.5% with
overall capital adequacy ratio at 11.4% for 2QFY12 but this excludes 1HFY12 profits.
We believe that SBI does not have any immediate requirement for capital. (1) Growth has
definitely slowed over the past few quarters and we are building 14% CAGR for FY2011-13E, (2)
Internal accruals are reasonably strong with RoEs (pre-dilution) at 17% levels and payout ratios of
20%—reasonably sufficient for underlying loan growth trends, (3) management shifting focus on
capital conservation through loan guarantees and is likely to release capital, especially in segments
like export and SME credit. However, some of these benefits are likely to be countered by
deterioration in ratings of its loan portfolio resulting in increase of risk-weighted assets.
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