State Bank of India - Gradual Progress on Right Track; Result Update Q2FY15:: Edelweiss

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State Bank of India’s (SBI) Q2FY15 PAT of INR31bn came in marginally lower than our estimates due to slower revenue traction and higher credit cost. The key positive was better-than-expected asset quality performance as: a) slippages improved to INR77bn (2.5% versus run-rate of 3.6% over past five quarters); b) this, along with controlled restructuring at INR40bn kept bank’s impaired asset formation (slippages plus restructuring) at sub-INR112bn (3.8%). Other key highlights were: 1) revenue traction was slower (NI up 8.4% YoY) – derivative of sluggish loan growth and lower NIMs; 2) but, controlled staff cost and higher other income aided core profitability; and 3) lower tax rate at 25% aided PAT to an extent. With structural growth levers in place (strengthened retail liability franchise - SA plus retail-TD at over 80%), stabilising core operating performance and improving non-banking subsidiaries’ performance, makes SBI our preferred bet in the PSU peer-set.

Asset quality gradual improvement underway 

The bank has been making a slow and steady improvement in asset quality over past four quarters - reflected in lower incremental stress formation. Q2FY15 was no different with slippages further improving to INR77bn (~38% from restructured book). Sector-wise NPL analysis suggests deterioration in SME and mid-corporate - reflection of underlying stress. In conjunction to this, restructuring was curtailed at INR40bn, with pipeline of just another INR30bn, which lends comfort. Outstanding restructured book stands at INR440bn (3.5%), best among PSU banks. Stress continues in mid-corporate and SME segments, but management expects asset quality to improve gradually hereon and play out with better macros.

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https://www.edelweiss.in/research/State-Bank-of-India--Gradual-Progress-on-Right-Track;-Result-Update-Q2FY15/27604.html