Remain Neutral on SBI:: Centrum

Remain Neutral
Not withstanding the largely in line bottom-line, SBI’s Q2FY13 core operating
performance and asset quality matrix disappointed us. Cautious management
commentary, overhang of high GNPA (5.2%), incremental restructuring and
potential adverse impact of monsoon failure should lead to
underperformance in the near term. We maintain Neutral stance on the stock
with a revised price target of Rs2,200.
Asset quality: pain persists: Asset quality matrices continued to worsen
further with: 1) slippages at Rs71bn (revised down from Rs 85bn) indicating 3%
annualised slippage rate 2) GNPA going up 4% QoQ to 5.2% - highest in
industry 3) PCR eroding by ~290bps to 54%. Meanwhile, the cumulative
restructured portfolio increased by ~10% QoQ to 4.4% of loans while
cumulative slippages from the pool stood at ~20%. While the restructured
portfolio remained lower than that of PSB peers (8-9% of loans), the stress
asset creation (slippages + incremental restructured) was high at Rs118bn
compared with ~Rs100bn run rate in recent quarters.
NIM contracts QoQ: NII grew by a weak 5% YoY to Rs110bn (vs our estimate
of Rs113bn). Sequentially, NIM witnessed contraction of 23 bps QoQ, led by
excess liquidity of ~Rs600bn and continued focus on large corporates and
home/car loans for growth. From a geographical perspective, domestic NIMs
moderated by 18bps to 3.68% while International NIMs saw a sharper decline
(by 35bps) to 1.42% as the bank witnessed weaker spreads in the case of Trade
Finance, its main lending activity in international business and due to rupee
depreciation. On a blended basis, the management now guides for 3.5% NIM
for FY13 (from 3.75% earlier), which seems achievable.

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Loan growth at 18%: While still healthy at 18%, loan growth has moderated
from ~20% level seen in recent quarters. Domestic loan book growth (16.2%
YoY) continued to lag the international loan book growth (27.4% YoY). From
segmental perspective, agri (28% YoY) and corporate book (27%) were the key
drivers. Meanwhile, mid-corporate and SME segments lagged materially led by
the cautious stance adopted by the management. The slower loan growth has
transpired into a weaker fee income stream. The management continues to
focus aggressively on the retail segment.
Remain Neutral: We have tweaked our earnings estimates to factor in
additional information. With Q2FY13 performance reflecting continued asset
quality pain and strain on core performance, our Neutral stance on the stock
remains. Moreover, the weaker monsoon so far only adds to asset quality risks
for the bank as agri book continues to grow at a fast clip. Given these aspects,
we expect the stock to underperform in the near term. At the current market
price, the stock trades at 1.7x FY14 ABVPS, 8.7x FY14E EPS that matches our
revised fair value estimate of Rs2,200. We maintain our Neutral stance on the
stock. We await concrete signals of the much anticipated revival in economic
activity before revisiting our asset quality assumptions and overall view on the
stock.