J.P. Morgan - State Bank of India

State Bank of India (SBIN IN) 4Q14: asset quality improves		Neutral Price Target: Rs1,800.00 PT End Date: 30 Sep 2014

SBI reported PAT of Rs30.4bn (down 8% y/y, 3%< JPMe & 8%>consensus). Asset quality improved with significant decline in gross delinquencies. Domestic margins remained resilient with liability franchisee remaining strong. Domestic loan growth remained muted at 13.3%, lower than the industry average.

Table 1: 4Q14 results table

(Rs m)	4Q13	3Q14	4Q14	YoY	QoQ
NII	110,784	126,405	129,028	16.5%	2.1%
Non-int inc	55,467	41,903	65,857	18.7%	57.2%
Opex	88,645	92,124	88,606	0.0%	-3.8%
PPOP	77,606	76,185	106,278	36.9%	39.5%
Provisions	41,810	41,496	58,911	40.9%	42.0%
PBT	35,797	34,689	47,367	32.3%	36.5%
Tax	2,804	12,345	16,960	504.8%	37.4%
PAT	32,992	22,343	30,407	-7.8%	36.1%
Cost - Income	53.3%	54.7%	45.5%	-7.9%	-9.3%
NIMs - (cumulative)	3.34%	3.19%	3.17%	-0.2%	-0.02%
NIMs - Qtrly	3.16%	3.21%	3.11%	-0.05%	-0.10%
ROA	0.94%	0.57%	0.73%	-0.21%	0.17%
Tax rate	7.8%	35.6%	35.8%	28.0%	0.2%
Balance sheet data (Rsbn)
Advances	10,456	11,489	12,098	15.7%	5.3%
Deposits	12,027	13,499	13,944	15.9%	3.3%
C/D ratio	86.9%	85.1%	86.8%	-0.2%	1.7%
Asset quality
Gross NPL	511,894	677,993	616,050	20.3%	-9.1%
Net NPL	219,565	371,674	310,960	41.6%	-16.3%
Gross NPL (%)	4.75%	5.73%	4.95%	0.2%	-0.8%
Net NPL (%)	2.10%	3.24%	2.57%	0.47%	-0.67%
Credit cost	1.67%	1.25%	2.20%	0.53%	0.95%
Coverage	57.1%	45.2%	49.5%	-7.6%	4.3%
ROA	0.94%	0.57%	0.73%	-0.21%	0.17%
Other income (Rs mn)
Core fees	43,480	36,145	51,146	17.6%	41.5%
Others	9,700	3,376	10,700	10.3%	216.9%
Treasury	2,290	2,382	4,011	75.1%	68.4%
Consolidated	4Q13	3Q14	4Q14	YoY	QoQ
Net interest income	155,340	171,968	176,455	13.6%	2.6%
Non-int inc	98,332	102,747	132,422	34.7%	28.9%
Operating expenses	149,014	175,926	176,173	18.2%	0.1%
Pre prov profit	104,658	98,789	132,703	26.8%	34.3%
Provisions	60,821	52,430	70,515	15.9%	34.5%
Profit before tax	43,837	46,358	62,188	41.9%	34.1%
Provision for tax	4,355	17,537	21,967	404.4%	25.3%
Profit after tax	39,482	28,822	40,221	1.9%	39.6%
Advances (Rsbn)	13,926	15,062	15,783	13.3%	4.8%
Deposits (Rsbn)	16,274	17,931	18,389	13.0%	2.5%

Source: J.P. Morgan estimates, Company data.

· Asset quality. Asset quality improved with reduction in gross delinquencies at 2.7% vs. 4% in the previous quarter. However, this was partially offset by higher restructured assets accretion at 2.6% vs. 1.4% in Q3. Credit costs inched up and stood at 2.2% vs. 1.3% in Q3, which led to improvement in PCR at 49.5%, up 430bp sequentially.

· Initiatives on asset quality. Management is undertaking various initiatives on asset quality, which should pay off in the longer term: 1) Agri loans - reworking overall product to ensure better collectability, 2) SME- Management has stepped up monitoring. This has already started yielding results. The NPLs in the SME book stood at 7.16% in Q4 v/s 9.09% in Q3. 3)Mid corporate- This segment continues to be challenging, however, incremental stress is being slowly arrested.

· Loan growth. The overall loan book grew 15.4%; however, the domestic loan growth was muted at 13.3%. Management is cautious on the mid corporate and SME segment, given the weak macro. Mid corporate segment grew 12% y/y, whereas SME loans declined 2% y/y. The overall retail book grew 13% driven by strong growth in home loans at 18% y/y.

· Margins. Domestic margins remained resilient at 3.49%, flat q/q as YOA improved by 7bp q/q. This was, however, offset by an increase in COD, which was up 2bp q/q. Overall margins stood at 3.17%, down only 2bp q/q. The liability franchisee continues to remain strong, with the share of Retail TD at 45.5% vs. 41.9% last year. The overall CASA ratio stood at 44.4%, up 54bp q/q, driven by strong growth in CA balances whereas SA balances were flat q/q.

Table 2: DuPont table

	3Q12	4Q12	1Q13	2Q13	3Q13	4Q13	1Q14	2Q14	3Q14	4Q14
NIM	4.05%	3.89%	3.57%	3.33%	3.30%	3.16%	3.16%	3.20%	3.21%	3.11%
Fees/Assets	1.14%	1.76%	1.05%	0.95%	0.96%	1.52%	0.90%	0.79%	1.00%	1.49%
Operating Expense/Assets	-2.24%	-2.45%	-2.07%	-2.11%	-2.07%	-2.53%	-2.32%	-2.41%	-2.34%	-2.14%
Provisions/Assets	-0.85%	-1.04%	-0.79%	-0.55%	-0.79%	-1.19%	-0.79%	-0.79%	-1.05%	-1.42%
ROA	1.15%	1.35%	1.20%	1.11%	1.00%	0.94%	0.89%	0.62%	0.57%	0.73%

Source: J.P. Morgan estimates, Company data.

Figure 1: Domestic margins remained resilient during the quarter

Source: Company data.

Figure 2: Higher CA balances resulted in improvement in CASA; though SA accretion remained muted

Source: Company data.

Figure 3: Lower delinquencies led to improvement in asset quality

Source: J.P. Morgan estimates, Company data.

Investment Thesis

We maintain our Neutral rating on the stock as:

1. We expect margins to remain stable in the medium term despite higher rates driven by strong liability franchisee and benefit of cap raise.

2. SBI does have valuation support but the near-term trajectory looks quite challenged. The pressure on asset quality continues to concern us.

Valuation

Our Sept-14 PT for SBI is Rs 1800 based on a Gordon growth model with a normalised ROE of ~15% and 2nd stage growth of ~12% and Rs274/share for the insurance & subsidiaries business.

Risks to Rating and Price Target

Key risks to our Neutral rating include: 1) Slower economic growth leading to higher delinquencies, 2) Rising restructuring leading to higher NPAs, 3) Higher loan growth can impact revenue positively.

��

-->