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SBI reported 30% miss in headline PAT of Rs 15.8 bn, despite inline
PPOP. One-off investment depreciation and 50% tax rate were the
drivers. Weak asset quality drives our ~10% earnings cut despite a strong
margin beat. Despite a PT cut to Rs2400 (from Rs 2700), we maintain OW
on valuation (1.25x FY12 book). We, however, prefer private banks with
HDFC Bank as our top pick.
Asset quality woes continue: Asset quality continues to disappoint with
Rs62bn of gross delinquencies, much higher than expected. Though
credit costs pressure would moderate from 2HFY12 as one time
provisioning ends, but moderation in economic growth could keep
delinquencies elevated. We believe 1.5% net NPA guidance would be
attained through higher provisions rather than lower delinquencies.
Margins a positive surprise: Margin improvement of >50bps q/q was
better than expected as hike in PLR/base rate aided lending yields and
higher CASA ratio and lower repricing of 1000 day deposits kept
funding costs under check. We believe, SBI would be able to deliver on
its 3.5% margin guidance and margin improvement would net off slow
fee income and higher opex growth.
Capital: SBI's management was very positive on the rights issue though
quantum could vary depending upon government contribution. We had
already factored in Rs150bn dilution and believe any news on rights
issue would address growth concerns.
Maintain Overweight: 1Q12 was a mixed qtr with relatively strong
operating performance but disappointing asset quality. We cut FY12-13E
earnings and PT by ~10% largely driven by higher NPA provisions but
PPOP is relatively unchanged as higher margins offsets lower fees and
higher opex. Slower economic growth leading to higher delinquencies
and slower loan growth is the key risk.
Margins have surprised:
Margins have moved up sharply to 3.6% in 1Q12 v/s 3.1% 4Q11 inline with
management's recent guidance. Margins was better than expected as
lending rates was aided by aggressive increase in PLR/base rate and funding
costs remained low aided by high CASA and more importantly lower
reprising of high costs term deposits (1000 day deposits) picked up in 2008-
09.
For FY12, management maintained it guidance of margins of 3.5% with a
marginal upward bias v/s 3.3% in FY11. We increase our margin estimates
as SBI would continue to benefit from lower repricing of deposits but
further hike in rates would be difficult to pass on.
Asset quality pain continues:
Asset quality continues to disappoint with Rs62bn of gross delinquencies
(3.3% of loans) which is much higher than expected leading to higher than
expected credit costs.
Delinquencies continue to remain high across corporate and Agri sectors
with SME NPAs increasing to 4.2% and Agri NPAs inching upto >7.0% in
1Q12. We believe rising rates would continue to pressure SME asset quality
with NPAs inching up in sectors like textiles.
We believe delinquencies would continue to remain elevated and hence
increase our credit costs by ~20% for FY12-13E. 1.5% net NPA guidance
would be attained through higher provisions rather than lower
delinquencies.
Other highlights:
Fee income: Fee income growth has been muted at just 2% y/y growth in core fees
and we expect muted fee income growth as the bank concentrates on balance sheet
based business with lower income expected from non fund sources like guarantees.
Capital: Management sounded positive on rights issues in FY12 though quantum
would depend upon government infusion. We had already factored in Rs150bn of
issuance but we now assume issuance at Rs2400/share v/s Rs2800/share earlier.
Tax rate continues to remain high: Tax rate at 49% in 1Q12 was higher than
expected. Tax rate continues to remain high from 4Q11 mainly due to disallowed
provisions on pensions and NPAs. Difference between pension paid and pension
provisions created is the main reason for the higher tax and this is expected to keep
tax rate elevated. We factor in 38% tax rate for FY12-13E.
Revise earnings, Maintain Overweight:
We cut FY12-13E earnings and PT by ~10% largely driven by higher NPA
provisions but PPOP is relatively unchanged as higher margins offsets lower fees and
higher opex. We maintain OW with revised PT of Rs2400/share as valuations remain
undemanding at 1.25x FY12 book but our preference for private banks continues
with HDFC Bank as our top pick.
Figure 7: SBI: PT of Rs2400/share
Risk free rate 8.0%
Equity Risk Premium 6.0%
Beta 1.20
Cost of Equity 15.2%
Terminal growth 5.0%
Stage 2 growth 17.0%
Normalized ROE 16.8%
Mar-12 PT 2400
Implied FY12 P/B 1.43
Implied FY12 P/E 9.9
Source: J.P.Morgan estimates
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
SBI reported 30% miss in headline PAT of Rs 15.8 bn, despite inline
PPOP. One-off investment depreciation and 50% tax rate were the
drivers. Weak asset quality drives our ~10% earnings cut despite a strong
margin beat. Despite a PT cut to Rs2400 (from Rs 2700), we maintain OW
on valuation (1.25x FY12 book). We, however, prefer private banks with
HDFC Bank as our top pick.
Asset quality woes continue: Asset quality continues to disappoint with
Rs62bn of gross delinquencies, much higher than expected. Though
credit costs pressure would moderate from 2HFY12 as one time
provisioning ends, but moderation in economic growth could keep
delinquencies elevated. We believe 1.5% net NPA guidance would be
attained through higher provisions rather than lower delinquencies.
Margins a positive surprise: Margin improvement of >50bps q/q was
better than expected as hike in PLR/base rate aided lending yields and
higher CASA ratio and lower repricing of 1000 day deposits kept
funding costs under check. We believe, SBI would be able to deliver on
its 3.5% margin guidance and margin improvement would net off slow
fee income and higher opex growth.
Capital: SBI's management was very positive on the rights issue though
quantum could vary depending upon government contribution. We had
already factored in Rs150bn dilution and believe any news on rights
issue would address growth concerns.
Maintain Overweight: 1Q12 was a mixed qtr with relatively strong
operating performance but disappointing asset quality. We cut FY12-13E
earnings and PT by ~10% largely driven by higher NPA provisions but
PPOP is relatively unchanged as higher margins offsets lower fees and
higher opex. Slower economic growth leading to higher delinquencies
and slower loan growth is the key risk.
Margins have surprised:
Margins have moved up sharply to 3.6% in 1Q12 v/s 3.1% 4Q11 inline with
management's recent guidance. Margins was better than expected as
lending rates was aided by aggressive increase in PLR/base rate and funding
costs remained low aided by high CASA and more importantly lower
reprising of high costs term deposits (1000 day deposits) picked up in 2008-
09.
For FY12, management maintained it guidance of margins of 3.5% with a
marginal upward bias v/s 3.3% in FY11. We increase our margin estimates
as SBI would continue to benefit from lower repricing of deposits but
further hike in rates would be difficult to pass on.
Asset quality pain continues:
Asset quality continues to disappoint with Rs62bn of gross delinquencies
(3.3% of loans) which is much higher than expected leading to higher than
expected credit costs.
Delinquencies continue to remain high across corporate and Agri sectors
with SME NPAs increasing to 4.2% and Agri NPAs inching upto >7.0% in
1Q12. We believe rising rates would continue to pressure SME asset quality
with NPAs inching up in sectors like textiles.
We believe delinquencies would continue to remain elevated and hence
increase our credit costs by ~20% for FY12-13E. 1.5% net NPA guidance
would be attained through higher provisions rather than lower
delinquencies.
Other highlights:
Fee income: Fee income growth has been muted at just 2% y/y growth in core fees
and we expect muted fee income growth as the bank concentrates on balance sheet
based business with lower income expected from non fund sources like guarantees.
Capital: Management sounded positive on rights issues in FY12 though quantum
would depend upon government infusion. We had already factored in Rs150bn of
issuance but we now assume issuance at Rs2400/share v/s Rs2800/share earlier.
Tax rate continues to remain high: Tax rate at 49% in 1Q12 was higher than
expected. Tax rate continues to remain high from 4Q11 mainly due to disallowed
provisions on pensions and NPAs. Difference between pension paid and pension
provisions created is the main reason for the higher tax and this is expected to keep
tax rate elevated. We factor in 38% tax rate for FY12-13E.
Revise earnings, Maintain Overweight:
We cut FY12-13E earnings and PT by ~10% largely driven by higher NPA
provisions but PPOP is relatively unchanged as higher margins offsets lower fees and
higher opex. We maintain OW with revised PT of Rs2400/share as valuations remain
undemanding at 1.25x FY12 book but our preference for private banks continues
with HDFC Bank as our top pick.
Figure 7: SBI: PT of Rs2400/share
Risk free rate 8.0%
Equity Risk Premium 6.0%
Beta 1.20
Cost of Equity 15.2%
Terminal growth 5.0%
Stage 2 growth 17.0%
Normalized ROE 16.8%
Mar-12 PT 2400
Implied FY12 P/B 1.43
Implied FY12 P/E 9.9
Source: J.P.Morgan estimates
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