State Bank of India (SBIN)
Banks/Financial Institutions
Tough times for subsidiaries. SBI’s banking subsidiaries’ FY2012 performance was
weak on most counts: (1) A sharp rise in slippages/restructuring resulting in higher
provisions, (2) a decline in NIMs and (3) subdued non-interest income. We expect
profitability to be weak over the medium term (RoE of about 15% and RoAs of 0.8-
0.9%) as we factor the regulatory impact of dynamic provisions. The contribution of the
subsidiaries remains low at 13% of the overall value. Maintain BUY.
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Earnings growth muted in FY2012; expect continued pressure on RoA and RoEs
SBI subsidiaries reported a weak performance on earnings (flat yoy) due to higher credit costs (up
10 bps), lower NIM (down 15 bps) and weak non-interest income. We expect earnings of 11%
CAGR over FY2012-14 factoring slower loan growth (14% CAGR), weak non-interest income to
continue (11% CAGR) and high credit costs of 24% CAGR (dynamic provisions). RoA and RoEs
would continue to remain under pressure in the medium term (RoAs at 0.8-0.9% and RoEs at 14-
15%).
A challenging year for asset quality; coverage ratio declines
FY2012 was one of the most challenging years for SBI’s banking subsidiaries in recent times as
about 8% of loans either slipped into NPLs or had to be restructured (4% each). Overall gross NPLs
increased 100 bps to 3% and net NPLs increased 100 bps to 2% of net loans. Transition-related
issues seem to have created most of the impact on NPLs. Loan-loss provisions remained high at
1.1% and the NPV sacrifice was marginally higher at 4% of restructured loans. Coverage ratios
declined due to higher slippages and write-offs.
Well capitalized for now; dilution needed in a few subsidiaries
A combination of lower RWA growth and capital infusion resulted in tier-1 ratio improving by 100
bps to 9% with core tier-1 ratio at 8.5%. Select subsidiaries would need additional capital in the
medium term but we see limited risk, especially considering slower balance sheet growth, towards
transition of these banks under the new Basel-3 guidelines.
Lower retirement benefits aid better cost management
Cost ratios were broadly stable in FY2012 at 45% with select banks reporting a decline in staff
costs. Importantly, the shortfall between pension assets/liabilities declined to 3% of net worth
against 10% in FY2011. We broadly expect cost ratios to remain closer to current levels factoring
the impact of new wage agreement.
Flat earnings due to weak performance by two subsidiaries
FY2012 was a reasonably challenging year for select banking subsidiaries as credit costs
continued to rise, fee income growth disappointed at all subsidiaries and NIMs declined at
most banks.
Performance by two subsidiaries led the muted earnings in FY2012.
State Bank of Travancore reported a 30% decline in earnings, led by a sharp rise in credit
costs (60% yoy) and
State Bank of Mysore reported a 26% decline in earnings (3% decline in NII) in FY2012.
The other subsidiaries reported fairly strong performance as State Bank of Patiala delivered
22% yoy growth, State Bank of Bikaner and Jaipur reported 18% yoy growth and State
Bank of Hyderabad reported earnings growth of 11% yoy.
Asset quality was under pressure with slippages at 4% and fresh restructuring at 4.3%
driving overall credit costs to 1.1%.. RoAs declined by about 7 bps yoy to 0.8% in FY2012
and the impact on RoE was higher as one of the subsidiaries had capital infusion. Balance
sheet growth was healthy with overall loan growth at 20% yoy.
We expect earnings growth to remain muted over FY2012-14 as most of the banking
subsidiaries reported (1) a sharp decline in provision coverage ratio in FY2012 which we
expect to improve to meet the new regulatory requirements (70%), (2) factor the impact of
dynamic provisions in our models and (3) impact of a new wage settlement over FY2012-
17E.
We expect overall earnings of 10% CAGR due to 14% CAGR in loans over FY2012-14E.
Overall balance sheet is reasonably well capitalized currently at 13% for FY2012 but select
subsidiaries would need capital as they steadily transition to Basel-3 requirements.
Higher provisions will affect near-term profitability
We broadly expect a muted performance on most return metrics for the banking subsidiaries.
SBI’s subsidiaries should deliver RoEs of 15% (before factoring dilution) and RoAs of 0.8-
0.9% over FY2012-15E. The ability to expand revenue contribution looks limited as NIMs are
on the higher side and fee income contribution is unlikely to improve as corporate activity is
likely to remain low. On the other hand, the impact of a new wage settlement (negotiations
are expected to start in FY2013) and dynamic provisions are likely to keep
expenses/provisions on the higher side.
Any upside is likely from (1) a sharp improvement in asset quality from loans that are
delinquent in small-ticket loans and (2) lower regulatory charge (on dynamic provisions
which has already been factored as we expect loan-loss provisions at 1.2% against 1.4%
recommended on RBI’s illustration).
Shortfall drops in retirement funds; retirement costs account for 20% of staff costs
Overall shortfall between pension assets and liabilities declined in FY2012 to 3% of networth
against 10% in FY2011. Higher contribution from SBI subsidiaries and a change in
assumptions contributed to this decline. Retirement costs accounted for 20% of the overall
staff costs in FY2012 against 31% when the bank had to fund the shortfall for benefits that
had been vested and a fifth of the total liability for employees who were yet to vest their
benefits.
Assumptions taken would continue to remain a concern as they are factoring all positives
that result in lower pension liability: (1) Lower discount rate, (2) higher returns on assets and
(3) a marginal increase in staff salary. We believe these liabilities would increase sharply after
every wage settlement. However, a key benefit is that new employees (post FY2007) are
under defined contribution compared with defined benefit, which should help in managing
the lower assumptions taken by public banks.
Buckets for CASA do not correlate with CASA growth
State Bank of Bikaner and Jaipur gives reasonably strong evidence on the ineffectiveness at
looking at the ALM profiles for banks. Most the bank’s low cost deposits are placed under
the >1 year buckets (equally split for CA and SA across three buckets – 1-3 years, 3-5 years
and >5 years bucket). Term deposits are mainly placed in the 14 day 3-year bucket. However,
one notes that CA growth has been muted in the past year at 8% yoy while SA growth was
better at 17% yoy. Over the past four years CA growth has been disappointing at 3% CAGR
while SA growth has been better at 16% CAGR over FY2008-12.
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