SBI - Q4FY13 Result Update - Centrum

Q4FY13 Result Update

State Bank of India

Rating: Buy

Target Price: Rs2,550

CMP: Rs2,178

Upside: 17%

A mixed bag

SBI’s Q4FY13 bottomline disappointed on higher provisioning though asset quality performance was encouraging (except for higher restructuring) - GNPA improved by 55bps QoQ to 4.8% and slippage rate eased by 100bps QoQ to 2.4%. While the operating environment remains tough, we believe that the macro is gradually on the mend with reforms aimed at project implementation likely to augur well for a pick up in credit demand as well as asset quality concerns. At current level, the stock offers a favourable risk-reward equation for long term investors. Maintain Buy and price target of Rs2,550.

m  Asset quality metrics improve; but not out of woods yet: Asset quality matrices registered dramatic improvement with: 1) slippages at Rs58.7bn -2.4% rate vs 3.5% in the previous quarter. 2) GNPA improving by 4%/55bps QoQ to 4.75% 3) PCR improving by ~500bps to 67%. The only discouraging aspect was a jump in incremental restructuring (Rs83.8bn vs Rs25bn avg for last four quarters) as some Q3 slippages got restructured. However, it should be noted that the o/s standard restructured book stands at 3.1% of loans vs +6% for most peers. Certain exposures to discoms (in process of getting restructured) along with other identified stress of Rs50bn could add to restructured book over the quarters to come.

m  NIM slips QoQ: NII de-grew by 4.4% YoY to Rs110.8bn though largely in line with our estimate of Rs113bn. Sequentially, NIM contracted by ~15bps QoQ to 3.2%. Yield on advances declined 20 bps QoQ on Rs7bn reversals on FITL provisions pertaining to higher restructuring. The management sounded optimistic about NIM expansion during FY14, despite incremental focus on low yield loans, led by relief from reversal of interest income arising from NPAs and restructuring.

m  Loan growth at 21%: Loan book grew in line with industry at 20.5% YoY with large corporate segment (40.4% YoY) and international loans (25% YoY) in the lead. Meanwhile, mid-corporate and SME segments at 18% and 12.4% YoY respectively grew at a relatively slower pace likely led by cautious view due to stress. Importantly, recent management initiatives on the retail segment have begun yielding results with loan growth picking up to 15% in Q4FY13 from 12.8% in Q1 and 13.6% in Q2FY13 and 14% in Q3FY13. Incrementally, the bank intends to focus on safe credit avenues (AAA corporate) with a view to protect risk-adjusted returns.

m  Maintain Buy: The Q4FY13 performance reflects continuity of challenges in operating environment (NIM pressure & higher restructuring). However, we believe that incremental stress asset creation in FY14 should be lower because 1) significant pain has been recognized 2) low restructured book (3.1% of loans) implies lower risk of slippages and 3) administrative reforms aimed at addressing investment cycle should begun yielding results. At the current market price, the stock trades at 1.7x FY14E ABV, 9.2x FY14E EPS. In the light of the correction post Q4 results, the current market price indicates an upside of 18% to our fair value estimate of Rs2550 (SBI (SA): Rs1860 (1.3x Sep’14E), Associate banks: Rs380, Non-bank businesses: Rs280 and Misc investments: Rs30). We maintain Buy.

Thanks & Regards, 

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