SBI -4Q13 results: weak numbers, but some positives on asset quality:: JPMorgan

SBI reported 4Q PAT of Rs 32.9bn, down 19% y/y, 20% below JPMe. The
key misses were on pensions and NPL provisions though incremental asset
stress showed improvement. We maintain our OW rating and our positive
view on PSU banks; we see this correction as a long-term entry
opportunity. Our thesis is driven by cheap valuations and early indicators
of the cycle turning — we see the bond market rally triggering monetary
transmission — and that remains unchanged.

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 Asset quality - some positive signs. Provisions spiked 44% q/q,
driving 4Q credit costs to 165bp. However, gross NPLs declined
4% q/q as incremental delinquency contracted and recoveries
accelerated. Provision coverage jumped 500bp to 57%, one of the
best among PSU banks. Incremental restructuring at Rs86.7bn was
a negative - management mentioned that this was fairly lumpy and
included two thermal power projects due to implementation delay.
 Weak operating numbers. PPOP growth was an anemic -19.1%
y/y driven by: a) weak margins as the benign loan pricing
environment starts to hurt, and b) pension and wage provisions for
the new wage agreement with unions that is expected to be
completed in FY14 with retrospective impact from Nov-12. PPOP
ROA, after a brief revival in FY12, has been weak for three
quarters now at ~2.1%.
 FY14 outlook. We see ROA improvement as provisioning comes
off - SBI benefits from a better NPA/restructured ratio than other
PSUs and higher provision coverage up. On PPOP, we think
management will stay aggressive on loan growth but with a focus
on lower risk - we see margins staying soft till deposit rate cuts
start later in CY13. We believe non-interest income should benefit
from better treasury profits and aggressive fee pricing. Opex
should stay elevated as pension hits from higher wages and
assumption changes get absorbed.