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India Equity Research Reports, IPO and Stock News
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http://www.kotaksecurities.com/pdf/indiadaily/indiadaily26032012.pdf
State Bank of India (SBIN)
Banks/Financial Institutions
Driving our NIM call. We believe that SBI’s NIMs are unlikely to compress significantly
as policy rates may not decline sharply, outlook on credit costs has not changed
materially and capital continues to remain a constraint despite the recent
announcements. We build moderation to factor a marginal shift in pricing power. We
expect the bank to deliver 16% CAGR and RoEs (post dilution) at 17% levels.
Attractively valued at 1.5X book and 10X FY2013E EPS (SOTP of `2,450). Maintain BUY
NIM outlook to remain strong though we factor moderation from peak levels
We maintain our positive outlook on NIMs for SBI as we believe that the recent expansion has
been driven by a combination of increasing lending yields (140 bps) that is commensurate with
peers, lower deposit re-pricing and improvement in CD ratio. Importantly, we note that lower repricing of deposits (shedding of wholesale deposits) has primarily aided improvement. Yields (KS
calc) indicate that SBI has closed the discount on which it was lending compared to others.
Lending spreads at a decade high; outlook depends on rate cuts
We believe that lending spreads, currently at a decade high, are likely to moderate from current
levels. We have seen four instances in the past. We expect a combination of (1) shift in pricing
power to borrowers, (2) outlook on RBI’s policy actions driving investment spreads, (3) outlook on
credit costs and (4) capital adequacy ratios to drive NIM performance. Weak outlook is likely to
shift pricing power but the other three parameters will favor high lending yields for the industry.
Capital infusion positive as tier-1 ratio would be above 9%; this is not the end of the road
We expect, post infusion of `79 bn in the bank by 4QFY12, the tier-1 ratio to improve to 9% which
should offer adequate comfort to the bank in the near term to shift focus on growth. However,
earnings retained from the current RoEs of 17% levels and dividend payout of 17-20% levels is
insufficient for meeting the Basel 3 guidelines as well as having growth capital. Hence, we expect a
combination of improvement in RoEs as well as capital infusion over the next few years to meet the
Basel-3 requirements. Our current RoEs and business growth requirements indicate a capital
requirement of about `165 bn. High infusion could pose risk to our near-term outlook on NIMs.
Few more quarters of improvement in small-ticket loans critical for overall slippages
3QFY12 saw better performance on slippages in retail, agriculture and SME. However, consistency
over the next few quarters through better recovery and lower slippages would be critical to
increase our confidence on the loan portfolio. Slippages in large corporate (35% of slippages) for
the past few quarters would be difficult to estimate as they tend to be lumpy in nature. We build a
reasonably conservative slippage of 3% and factor loan-loss provisions at 1.4% for FY2013-14E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily26032012.pdf
State Bank of India (SBIN)
Banks/Financial Institutions
Driving our NIM call. We believe that SBI’s NIMs are unlikely to compress significantly
as policy rates may not decline sharply, outlook on credit costs has not changed
materially and capital continues to remain a constraint despite the recent
announcements. We build moderation to factor a marginal shift in pricing power. We
expect the bank to deliver 16% CAGR and RoEs (post dilution) at 17% levels.
Attractively valued at 1.5X book and 10X FY2013E EPS (SOTP of `2,450). Maintain BUY
NIM outlook to remain strong though we factor moderation from peak levels
We maintain our positive outlook on NIMs for SBI as we believe that the recent expansion has
been driven by a combination of increasing lending yields (140 bps) that is commensurate with
peers, lower deposit re-pricing and improvement in CD ratio. Importantly, we note that lower repricing of deposits (shedding of wholesale deposits) has primarily aided improvement. Yields (KS
calc) indicate that SBI has closed the discount on which it was lending compared to others.
Lending spreads at a decade high; outlook depends on rate cuts
We believe that lending spreads, currently at a decade high, are likely to moderate from current
levels. We have seen four instances in the past. We expect a combination of (1) shift in pricing
power to borrowers, (2) outlook on RBI’s policy actions driving investment spreads, (3) outlook on
credit costs and (4) capital adequacy ratios to drive NIM performance. Weak outlook is likely to
shift pricing power but the other three parameters will favor high lending yields for the industry.
Capital infusion positive as tier-1 ratio would be above 9%; this is not the end of the road
We expect, post infusion of `79 bn in the bank by 4QFY12, the tier-1 ratio to improve to 9% which
should offer adequate comfort to the bank in the near term to shift focus on growth. However,
earnings retained from the current RoEs of 17% levels and dividend payout of 17-20% levels is
insufficient for meeting the Basel 3 guidelines as well as having growth capital. Hence, we expect a
combination of improvement in RoEs as well as capital infusion over the next few years to meet the
Basel-3 requirements. Our current RoEs and business growth requirements indicate a capital
requirement of about `165 bn. High infusion could pose risk to our near-term outlook on NIMs.
Few more quarters of improvement in small-ticket loans critical for overall slippages
3QFY12 saw better performance on slippages in retail, agriculture and SME. However, consistency
over the next few quarters through better recovery and lower slippages would be critical to
increase our confidence on the loan portfolio. Slippages in large corporate (35% of slippages) for
the past few quarters would be difficult to estimate as they tend to be lumpy in nature. We build a
reasonably conservative slippage of 3% and factor loan-loss provisions at 1.4% for FY2013-14E.
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