State Bank of India (SBIN IN) UW: Q4FY12 – A good quarter, but not the start of a trend  HSBC Research

State Bank of India (SBIN IN)
UW: Q4FY12 – A good quarter, but not the start of a trend
 4Q earnings were above estimates due higher other income
and lower credit costs; asset quality was much better than
ours and street expectations, but margins declined q-o-q
 FY13 and FY14 likely to see margin compression along with
sustained elevated credit costs; upcoming wage settlement
to increase operating cost ratios
 Retain UW rating and target price at INR2,000, implying 4.8%
potential return

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4QFY12 earnings came in at INR40.5bn, beating ours and street estimates. Improvement in
asset quality both at gross and net levels along with higher provision cover was the key
positive surprise, which resulted in the stock ending 5% higher than yesterday’s close.
Highlights: Loan growth at 16% y-o-y was driven primarily by the growth in relatively
lower yielding international segment (24% y-o-y), the riskier segments of farm credit (23%
y-o-y) and SME (16.3%). Bank saw a significant impact of high interest rates on its CASA
growth (6.4% y-o-y). CASA ratio, as a result, declined by 188bps y-o-y to 46.6%. However,
bank is focusing on growing retail term deposits by banking on its branch network leading to
just 2% y-o-y growth in bulk deposit against a 23% growth in retail deposits. Overall
increase in funding costs resulted in NIM declining by 15 bps q-o-q to 3.9%. Asset quality
improvement was a positive surprise for us as well as the street. Fresh slippages halved to
2% vs 4% in Q3 and recovery and upgradation exceeded slippages leading to a 17 bps
decline in GNPLs. Provision coverage ratio also improved from 62% in 3Q to 68%, leading
to a 40 bps q-o-q decline in NNPL ratio. Fresh additions to restructured book were INR51
bn; with this the total restructured book now stands at ~5% of loans.
Outlook: One quarter of good performance has not changed our outlook much, especially
given the tough macro environment, tight liquidity, currency depreciation and high
interest rates, which impacts corporates. We cut our FY13 and FY14 PAT estimates by
3.3% and 12%, respectively, as we build in margin compression, while largely retaining
operating costs and credit costs estimates.
Valuation and risks: SBI currently trades at 12-month forward multiples of 9.8x PE and
1.4x PB against its average 5-yr multiples of 13x PE and 1.8x PB. It currently trades at
53% premium to PE and 47% premium to PB over its PSU peers, despite its lower RoE
and RoA and therefore does not warrant any rerating. We retain our target multiples of
9.3x PE and 1.4x PB and retain our target price of INR2000. Retain Underweight. Key
upside risks: 1) Upturn in economic cycle 2) asset quality improves


Valuation and risks
Underweight, Target price INR2,000
We continue to value SBI using a weighted average combination of PE, PB, and economic profit model (EPM)
methodologies. We assign a 20%, 50% and 30% weight each to the PE, PB and EPM components respectively.
The three-stage EPM uses explicit forecasts until FY14e, followed by 10 years of semi-explicit forecasts.
The final stage of 12 years (fade period) assumes convergence of ROE and COE. EPM is based on the
assumptions in the following table:
SBI: EPM assumptions
Semi-explicit forecasts for 10 yrs
Loan CAGR 8%
Dividend payout 20%
Fade period of 12 yrs
Risk free rate 8%
Beta 1.0
Equity risk premium 6%
Cost of Equity 14%
EPM value of Bank 1,289
EPM value of Subsidiaries 472
Total EPM value (including subsidiaries) 1,761
Source: HSBC estimates


We are retaining our 12-month target price at INR2,000; see also the tables below.
Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and
below the hurdle rate for Indian stocks of 11%, or 6-16% above the current share price. Our target price
implies a potential return of 4.8%, including dividend yield, which is below the Neutral band; therefore,
we retain our Underweight rating. Potential return equals the percentage difference between the current
share price and the target price, including the forecast dividend yield when indicated.