SBI: Disappointing performance ::Centrum

Disappointing performance
Not withstanding marginal beat at bottomline, SBI’s Q1FY13 performance
was disappointing due to worsening asset quality matrix – essentially
reversing the improvement achieved in Q4FY12. Cautious management
commentary, overhang of high GNPA, incremental restructuring and
potential adverse impact of monsoon failure should lead to
underperformance in the near term. We downgrade the stock to Neutral given
limited upside to our revised target price of Rs2100.
Asset quality: Q4 improvement reversed: Asset quality matrices sprung a
materially negative surprise with: 1) GNPA up 19% QoQ to 5% - highest in
industry 2) slippage rate spiked to 5% 3) PCR eroded by ~400bps to 64% and
4) credit costs sustaining at a high 1.2%. Meanwhile, the cumulative
restructured portfolio was largely stable at ~4% loans while cumulative
slippages from the pool stood at 20%. While the restructured portfolio
remained lower than of PSB peers (8-9% of loans), the stress assets (GNPA +
restructured) was comparable. Management commentary on near term asset
quality trends makes us cautious on incremental restructuring and slippage
trends. Moreover, the worsening outlook for the agriculture sector only adds
to the already heightened asset quality concerns.
NIM contracts QoQ: NII grew by a strong 15% YoY to Rs111bn (vs our
estimate of Rs115bn). Sequentially, NIM witnessed contraction on lower loan
yields and rising funding costs while advances growth stood at 20% YoY. On
the margin front, we are building in contraction of 25bps during FY13 led by
recent lending rate cuts and potential risk to pricing power in a weak credit
demand environment.

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Loan growth at 20%: Led by strong growth in agri (26% YoY) and
international book (benefit of rupee depreciation) overall loan book growth
improved to 20% (vs 15% last quarter). Meanwhile, mid-corporate and SME
segments lagged materially led by cautious stance adopted by the
management. Capital position is healthy with Tier I at 9.4% & CAR at 13.2%.
MTM write-back supports bottom-line: The provisions came in lower than
expected at Rs 24.6bn (down 22% QoQ) as the bank benefitted from MTM
write-back of Rs5.2bn while NPA provisions were flat QoQ. Importantly, the
PCR eroded by 400bps even as the management claimed to have made an
extra provision of Rs7bn during the quarter. We have factored in sustained
stiff credit costs (~140bps) for FY13 and FY14.
Downgrade to Neutral: We have tweaked our earnings estimates to factor in
additional information. With Q1FY13 performance reversing the improvement
achieved on asset quality front in the previous quarter as well as
management’s cautious commentary on near term outlook, our concerns on
asset quality remains. Moreover, the weaker monsoon so far only adds to asset
quality risks for the bank. Given these aspects, we expect the stock to
underperform in the near term. At current market price, the stock trades at
1.5x FY14 ABVPS, 7.8x FY14E EPS and implies an upside of ~10% to our revised
fair value estimate of Rs2,100. We downgrade the stock to Neutral.