Focus on retail liabilities and core revenue
Net stress loans remain flat in FY12
Core strategy of focusing on NIMs yielded superior results; NIMs improved 50bp+ YoY
Net stress loan were flat for SBIN (v/s increase of 175-450bp for peers), led by
improvement in PCR and strategy of recognizing stress upfront.
On the consolidated book, growth in power and metals was high; however, proportion
of some other sensitive segments, viz, Textiles, Commercial real estate moderated.
Core Tier I ratio improved led by better capital management and equity infusion.
NIM at the core of strategy; fee income growth moderates: In FY12, SBIN reworked
its strategy to enhance revenue share through NIM rather than fees. NIM improved
from 3.3% to ~3.8% despite higher net slippages. Core income as a percentage of
average assets improved 40bp YoY to 4.3% even as fee income growth moderated
to just 4%.
Superior liability franchise: Over past five years, wherein most state-owned
banks have seen deterioration in their CASA ratio, SBIN has been able to maintain
it above 40% and seen impressive growth in spite of its size. Even though SA
growth moderated to 12% in FY12, traction in opening of new SA accounts
continued with bank adding 22.7m accounts in FY12. This would help bank to
improve its SA growth going forward.
Recognizing stress upfront; conservative restructuring policy: Gross and net
slippages rose to 3.3% (2.9% in FY11) and 2%(1.6% in FY11) respectively, leading
to asset quality concerns. However, in our view, addition of stress on balance
sheet should be seen in the context of restructuring (SBIN restructured 1% of
overall loans in FY12) and NPA provisions (PCR improved to 68% v/s 65% in
FY11). As a result, SBIN's overall net stress loans (NNPA + outstanding standard
restructured loans) was largely flat in FY12 v/s increase of 175-450bp for peers.
Exposure to sensitive sectors increases marginally: Overall exposure to sensitive
segments increased to 26.9% v/s 25.7%. This was led by strong growth in Metals
and Power including electricity (37-38% YoY) and Gems & jewelry (+40% YoY on
a lower base). However exposure to Textiles (-6% YoY) and Commercial real
estate (-10% YoY) declined, containing the overall rise in risky assets.
Core Tier I improves significantly: Core Tier I improved from 7.4% in FY11 to
9.3% in FY12 led by 1) equity infusion of INR79b, 2) strong internal accruals, and
3) better utilization of capital. Risk weighted assets grew just 2% YoY v/s balance
sheet growth of 9% and loan growth of 15%.
Top pick in PSBs: While pressure on asset quality is likely to persist given the
challenging macro environment, we believe SBIN is well placed to absorb the
same on the back of (a) strong improvement in core operating performance, (b)
one of the lowest net stress loans (NSLs) among PSBs, and (c) earnings CAGR of
22%+ over FY12-14. The stock trades at 46% discount to its LPA valuations. Buy
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