1. Detailed Report | 7 June 2012
Sector: Financials
State Bank of India
Look beyond the feet
Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
Sohail Halai (Sohail.Halai@MotilalOswal.com); +91 22 3982 5430
2. State Bank of India
State Bank of India: Look beyond the feet
Page No.
Summary .............................................................................................................. 3
How SBIN has fared over the last two years ................................................ 4-5
Asset quality: Net stress loans lowest among PSBs ................................... 6-10
NIM: To remain healthy; CRR cut, capital raising to provide cushion .... 11-12
CASA ratio: Best among peers; challenges increased .............................. 13-14
Fee income: Granularity to ensure healthy growth ..................................... 15
Capitalization: Tier-I higher than peers; likely to improve ............................ 16
Earnings: Healthy core operations, absence of one-off provisions
to drive strong growth ............................................................................... 17-18
Valuations: Trading at 20% discount to LPA ............................................. 19-21
Financials and valuation ............................................................................. 22-23
Indices and stock prices as on 5 June 2012
7 June 2012
2
3. Detailed report | 7 June 2012
Sector: Financials
State Bank of India
BSE SENSEX
S&P CNX
16,021
4,863
CMP: INR2,080
TP: INR2,725
Buy
Look beyond the feet
Significant strengths outshine slippage concerns
Bloomberg
SBIN IN
Equity Shares (m)
671.0
52-Wk. Range (INR) 2,530/1,576
1,6,12 Rel.Perf.(%)
9/14/3
M.Cap. (INR b)
1,395.8
M.Cap. (USD b)
25.1
Valuation summary (INR b)
Y/E March
2012
NII
433
OP
316
NP
117
EPS (INR)
174.5
EPS Gr. (%)
34.0
ConsEPS(INR) 228.6
Cons P/E (x)
9.1
BV (INR)
1,251
Cons BV (INR) 1,583
Cons P/BV (x)
1.3
RoE (%)
15.7
RoA (%)
0.9
2013E
474
359
155
230.6
32.2
288.0
7.2
1,429
1,819
1.1
17.2
1.1
2014E
525
405
184
274.5
19.0
342.9
6.1
1,641
2,099
0.9
17.9
1.1
Shareholding pattern % (Mar-12)
Others,
9.9
Domestic
Inst, 17.1
Foreign,
11.4
Promoter,
61.6
Stock performance (1 year)
7 June 2012
In the last two years, State Bank of India (SBIN) has witnessed significant earnings
volatility and material change in core earnings parameters. 4QFY12 results, which
surprised positively, gave an indication of the bank’s sustainable earnings.
In this note, we (a) assess the significant changes that have happened in the last two
years in core operating parameters, and (b) address some of the key market concerns
relating to the bank.
We retain SBIN as our top pick in the sector, on the back of (a) strong improvement in
core operating performance, (b) one of the lowest net stress loans (NSLs) amongst
PSBs, and (c) one of the highest earnings CAGR of 25%+ over FY12-14. The stock trades
at 20%+ discount to LPA. Buy for 31% upside.
Contrary to perception, net stress loans lowest among PSBs: Over the last two
years, SBIN has reported significantly higher net slippages as compared to peers,
leading to the perception of higher asset quality issues. While reported net
slippages have been higher, restructured loans as a percentage of overall loans
are one of the lowest among public sector banks (PSBs).In FY12, SBIN reported
flat net stress loans (NSLs), while peers reported an increase of 75-140bp
excluding AI and SEBs and 170-450bp including AI and SEBs. Notably, SBIN has
the lowest NSLs (%), despite moderate loan growth. Despite taking the pain
upfront, SBIN has also managed to improve provision coverage ratio (PCR) on
the back of strong core operating performance (for further details, please refer
to our sector update dated 31 May 2012).
NIM to remain healthy; CRR cut, capital raising to provide cushion: Re-pricing of
high cost deposits, strong CASA traction and significant re-pricing of loan book
led to sharp improvement in SBIN’s FY12 NIM, despite higher net slippages. Its
peers, on the other hand, witnessed a 10-60bp decline in NIM. Fall in interest
rates, moderation in loan growth, rising competition for CASA deposits and
moral suasion by the Government of India (GoI) to reduce lending rates will put
pressure on NIM. However, reduction in CRR (release of INR130b, ~10bp NIM
push) and equity infusion (INR79b, ~5bp NIM push) will provide cushion.
Absence of one-off provisioning and loss on investments to aid earnings growth:
In FY12, SBIN’s earnings were marred by higher one-off provisions and loss on
investments (20% of PBT). Adjusting for these, core PBT would have already
been at ~1.8% (of average assets) as against the reported 1.4% in FY12 and 1.5%
in FY11. Lower base of fee income over FY11/12, coupled with continuous
traction in fees pertaining to transaction banking , letters of credit, bank
guarantees (over 75% of overall fee income in FY12) will lead to fee income
CAGR of 15% over FY13-14. Healthy NIM, higher fee income, control over opex,
and absence of one-offs will help SBIN to post earnings CAGR of 25%+ over
FY13-14, one of the highest among PSBs.
3
4. State Bank of India
How SBIN has fared over the last two years
Focus shifted to NIM to achieve higher return ratios (%)
Even in a challenging environment, SBIN has delivered strong
margin performance, unlike its peers.
Using size advantage, re-priced loan book aggressively (%)
Increase in base rate and re-pricing of credit risk has led to
sharp improvement in yield on loans. Notably, SBIN's base
rate remains the lowest among PSBs.
Cost to core income has improved significantly (%)
Better core operating performance and control over opex has
led to sharp improvement in cost to core income.
7 June 2012
SBIN only PSB to improve NIM YoY (%)
Sharp NIM improvement helped to take care of one-off
provisions without impacting earnings growth. SBIN's NIM
increased 50bp v/s 10-60bp decline for peers.
Fee income growth has moderated (%)
While loan processing fees have declined, leading to
moderation in overall fee income growth, the growth in
transaction banking fees remains healthy.
Net investment loss a drag on profitability
Realized and MTM loss on investments for FY12 was INR15.8b
– 9% of PBT.
4
5. State Bank of India
Core operating profit growth bounced back sharply
Strong margin performance and control over opex has led to
sharp improvement in core operating performance, despite
fees being under pressure.
Net stress (net slippages+addition to RL) has been high in FY12
Asset quality pressure remained high in FY12; however,
4QFY12 performance was a positive surprise.
SBIN: NSLs declined 50bp over FY10-12 (%)
While NNPA has increased, standard restructured loans as a
percentage of overall loan book have declined, leading to
overall decline in stressed assets
Core PBT excluding one-offs improved significantly (INR b)
Core PBT (ex one-offs and trading losses) for FY12 was INR225b
(v/s INR169b for FY11) as against reported PBT of INR186b, led
by SBIN’s strong underlying core performance.
PCR has improved significantly
Despite higher net slippages, SBIN achieved significant PCR
improvement, contrary to other PSBs.
Stressed loan proportion increased across sector (ex SBIN) (%)
SBIN is the only bank to report stable stressed loans; SEB and
AI constitute 10-300bp of stressed loan for large PSBs.
Source: Company/MOSL
7 June 2012
5
6. State Bank of India
Asset quality: Net stress loans lowest among PSBs
What has changed?: SBIN has witnessed significant asset quality improvement in 4QFY12.
Market concern(s): A challenging macroeconomic environment is likely to keep stress at
an elevated level.
Our view: On a reported basis, SBIN has shown higher net slippages as compared to
peers. However, we argue that asset quality performance should be seen after considering
restructured loans. While its asset quality could see some pressure, given the challenging
macroeconomic environment, considering its proactive NPA recognition, lower
restructured loans and special emphasis on recoveries and upgradations, SBIN’s net stress
loan additions are likely to be lower than FY12. Also, significantly higher base of FY12 NPA
provisions, healthy NIM and fee income growth will help SBIN to withstand higher net
slippages (similar to FY12, if any) and can still grow earnings at 25%+.
Slippages higher than peers, but should be viewed in conjunction with
restructured assets
Please refer to our sector
update dated 31 May 2012
7 June 2012
On a reported basis, SBIN has shown higher net slippages as compared to peers.
However, we argue that asset quality performance should be seen after
considering restructured assets.
Unlike peers, SBIN has been aggressive in recognizing stress upfront and has lower
restructured loans on the balance sheet. Loan growth has been moderate over
the last two years, which puts it in a relatively better position than peers.
Over the last one year, while SBIN's net stress loans (ex AI and SEBs) have declined
15bp, for other PSBs, they have increased 75-140bp. (For details, please refer to
our sector update dated 31 May 2012).
In FY12, net slippage ratio has increased to 2%, the highest since FY04. Despite
being already on system-based NPA recognition in FY11, SBIN's net slippage ratio
increased in FY12. For other PSBs (ex-SBIN), the aggregate net slippage ratio was
1.6%.
While the initial part of the stress was witnessed in the agriculture and retail
segments, later, the mid and large corporate segments accounted for bulk of the
stress that got added to the balance sheet.
Higher GNPAs in the agriculture segment are explained to an extent by (a) lag
impact of the agri debt waiver scheme, and (b) lead bank status in remote locations
in India, compelling SBIN to have higher agriculture lending in those locations.
The management has also put special emphasis on recoveries and upgradations.
Hence, on a higher base, net slippages are unlikely to be higher than FY12. Though
some increase in restructured loans cannot be ruled out, we believe a large chunk
should be through cases under CDR, which would largely affect most banks under
the consortium.
6
7. State Bank of India
Evaluating SBIN’s performance on asset quality in FY12 v/s large PSBs
For all other large PSBs, net stressed assets (NNPAs + OSRLs) as a percentage of
loans have increased by 75-140bp (excluding SEBs and AI) and by 170-450bp
(including SEBs and AI). For SBIN, net stressed assets as a percentage of loans
have remained flat in FY12 on a reported basis and declined ~15bp excluding AI.
Stress on net worth (adjusted for tax), assuming that 20% of the outstanding
standard restructured loans (ex SEBs and AI) turn into NPAs and outstanding
NNPAs, is less than 20%, in line with peers. Only BOB has lower stress on net
worth at 11%.
Despite high net slippages, SBIN is the only bank to witness PCR improvement in
FY12. SBIN’s PCR (including technical write-offs) is the second highest (after BOB)
amongst large PSBs. This is a significant reversal of the situation two years ago.
While increase in GNPAs (bp) is
higher than peers...
... strong improvement in PCR (significant
reversal of situation two years ago)…
While SBIN reported stable NSLs YoY (%)…
On reported basis, SBIN’s asset quality appears inferior to
peers. Its stressed assets have remained at 5.5-6%.
… led to lower NNPAs increase (bp)
than peers
… other PSBs reported significant increase (%)
Of the 320bp increase in NSLs, 190b was on account of SEBs
and AI.
Aggregate NSLs for PSBs ex SBIN
7 June 2012
7
8. State Bank of India
Proportion of stressed loans have increased (%)
Strong loan CAGR helps PNB and BoB to contain NSLs proportion
SBIN is the only bank to report stable stressed loans; SEBs
and AI forms 10-300bp of stressed loans for large PSBs.
SBIN's NSLs should also be viewed in the context of moderate
loan growth.
(%)
Source: Company/MOSL
Stress on NW of ~20% comparable to peers
FY10
SBIN’s stress on NW has
remained largely stable,
in contrast to significant
increase for peers
FY11
17.3
11.0
9.5
21.7
13.6
16.1
SBIN
PNB
BOB
BOI
CBK
UNBK
19.6
14.2
9.1
16.3
15.0
17.7
FY12
18.3
19.4
11.2
21.3
18.2
24.4
Source: Company/MOSL
Evaluating what has caused large stress in SBIN’s book
SBIN has witnessed significantly higher net slippages in the agriculture, retail and
mid-corporate segments. GNPAs are as high as 9% for the agriculture segment.
Higher GNPAs in the agriculture segment are explained to an extent by (a) lag
impact of the agri debt waiver scheme, and (b) lead bank status in remote locations
in India, compelling SBIN to have higher agriculture lending in those locations.
In the mid-corporate segment, SBIN has been more proactive in recognizing
stressed loans than restructuring them. Industry-wise, Textiles and Iron & Steel
are the most problematic segments, where stress assets are as high as 20%+.
Break-up of GNPAs (%)
SME and Retail GNPA
share higher than
loan share
7 June 2012
FY10 Loan
Mix (%)
Corporate
36
Overseas
15
SME
15
Agri
12
Retail
21
Total
100
1Q
33
8
23
14
22
100
FY11
2Q
3Q
36
35
8
9
21
20
15
16
20
20
100
100
FY11 Loan
4Q Mix (%)
25
37
9
14
31
16
18
12
17
21
100
100
FY12
1Q
37
8
21
19
15
100
2Q
36
7
22
20
14
100
3Q
33
7
29
19
12
100
FY12 Loan
4Q Mix (%)
33
36
6
15
30
16
20
13
11
20
100
100
8
9. State Bank of India
Seasonal improvement
Agri and Retail net
slippages in 4QFY12 and
better than expected
performance in corporate
segment led to positive
surprise in 4QFY12
Net slippages down sharply in 4QFY12(INR m)
Corporate
International
SME
Agri
Retail
Overall
1QFY11
1,020
-430
4,060
9,670
4,850
19,170
2QFY11
15,320
3,430
3,660
8,050
1,330
31,790
3QFY11
11,110
570
-550
3,650
2,450
17,230
4QFY11
12,990
2,580
7,260
9,110
-2,150
29,790
1QFY12
10,390
490
10,270
8,210
1,100
30,460
2QFY12 3QFY12 4QFY12
21,180
33,180
2,130
1,600
5,280
-3,460
19,080
14,580
4,160
15,940
7,780
1,690
7,180
1,110
-7,900
64,980
61,930
-3,380
Source: Company/MOSL
Industry-wise stress assets
O/S Loans
(INR m)
Higher stress is visible in
the textiles and iron &
steel segments
GNPA
(INR m)
Iron & Steel
444,280
Textiles
349,780
Engineering
250,310
Infrastructure 765,030
Overall
8,936,130
35,770
19,620
16,740
12,750
396,765
Higher stress in SME and agri segments (%)
FY11
GNPA
(%to o/s
loans)
8.1
5.6
6.7
1.7
4.4
RSL
(INR m)
24,940
64,870
16,690
32,830
311,580
RSL
(% to o/s
loans)
5.6
18.5
6.7
4.3
3.5
GNPA
GNPA
+ RSL + RSL (% to
(INR m) o/s loans)
60,710
13.7
84,490
24.2
33,430
13.4
45,580
6.0
708,345
7.9
Source: Company/MOSL
Higher stress in SME, mid-corporate and agri segments (%)
FY12
Do 4QFY12 results mark the end of asset quality deterioration?
In the quarter gone by, SBIN reported sharp decline in net slippages for the
agriculture and retail loan segments, which in our view was partially due to
seasonal factors (4Q and 1Q are the best quarters for upgradations/recoveries).
Given that there is higher stress in the macroeconomic environment and SBIN is
the largest lender, its asset quality could see some pressure, going forward.
However, considering its proactive NPA recognition, lower restructured loans and
special emphasis on recoveries and upgradations, SBIN’s net stress assets are
likely to be lower than earlier years.
SBIN's highly diversified loan book and management guidance of INR20b net
additions to GNPAs and lower than 4Q net additions to restructured loans also
provides comfort.
Significantly higher base of FY12 NPA provisions (due to higher net stress additions,
improvement in PCR and one-off provisions), healthy NIM and fee income growth
will help SBIN to withstand higher slippages (similar to FY12, if any) without
compromising earnings growth of 25%+.
7 June 2012
9
10. State Bank of India
Provision cover expected to improve going forward leading to decline in NNPA (%)
Based on our
conservative credit cost
assumptions, we expect
provision coverage to
improve going forward
Credit cost and net slippage assumptions conservative; PCR expected to improve further (%)
After excluding one-offs,
we have conservatively
modeled in credit costs at
similar levels as in FY12
Well-diversified loan book (%)
Well-diversified industrial exposure (% of loans)
Agri loan break-up (%)
Retail loan break-up (%)
7 June 2012
10
11. State Bank of India
NIM: To remain healthy; CRR cut, capital raising to provide
cushion
What has changed?: Focus has shifted to NIM improvement to achieve higher core
profitability.
Market concern(s): Slowing deposit growth and reversal in interest rate cycle could put
pressure on margins.
Our view: The trend of healthy NIM has continued into FY13. However, being conservative,
we factor in 15bp NIM decline in FY13.
NIM increased by a sharp 50bp in FY12
Under the new management, SBIN’s focus has shifted to generating higher NIM to
improve core profitability and provide for credit loss. Using its funding (driven by
strong liability mix, with high CASA share) and size (largest banking franchise in
the country) advantage, SBIN has extracted higher margins by deriving benefits
from both the asset and liability side.
SBIN’s NIM increased sharply (+50bp YoY) in FY12, driven by (a) a healthy ~135bp
improvement in yield on loans, led by re-pricing of portfolio yields, (b) relatively
higher share of incremental CASA deposits at ~30%, and (c) re-pricing of high cost
term deposits (cost of term deposits up just 75bp v/s 150bp for peers).
Notably, despite re-pricing its loans by hiking base rate faster than the industry
during FY12, SBIN’s base rate remains among the lowest in the industry. The
significant improvement in yield on loans, despite a stable loan portfolio mix and
significantly higher net slippages, was a positive surprise.
Adequate cushion available; factoring in 15bp NIM decline in FY13
A falling interest rate scenario, coupled with moderate economic growth and
moral suasion by GoI to reduce lending rates is leading to higher concerns on NIM
for the sector and SBIN in particular. Moreover, slowing deposit growth and reversal
in interest rate cycle could put pressure on margins.
However, some of the factors that will work in favor of SBIN are: (a) capital infusion
by GoI (INR79b, ~5bp NIM push), (b) FY12 NIM was impacted by higher interest
reversals on account of higher net slippages, (c) it still has the lowest base rate in
the system, and (d) reduction in CRR (release of INR130b, ~10bp NIM push).
Based on improved disclosures, SBIN has already demonstrated improvement in
margins on a MoM basis. The management has also highlighted that the trend of
healthy NIM has continued in the first two months of FY13.
While positive factors will give ~15bp NIM push, on a conservative basis, we factor
in 15bp NIM decline in FY13.
SBIN has been
witnessing continuous
up-tick in domestic
margins
7 June 2012
MoM movement in NIM (global, domestic and overseas) (%)
Mar-11 Jun-11
Domestic 3.63
Overseas 1.37
Global
3.32
3.89
1.66
3.62
Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12
3.82
1.59
3.55
3.86
1.62
3.59
3.98
1.70
3.70
3.99
1.77
3.72
4.08
1.75
3.79
4.12
1.72
3.82
4.14
1.82
3.85
4.14
1.79
3.84
4.17
1.70
3.85
11
12. State Bank of India
Structurally moving towards higher NIM (%) …
Sharp improvement in yield on loans and strong control over
cost of funds have enabled SBIN to improve NIM.
…led by sharp improvement in yield on loans* (%)
SBIN has effectively demonstrated its pricing power in FY12.
*calculated taking into consideration yield on overseas loans for BOB
Strong control over cost of deposits (%)
Lowest increase in cost of term deposits (bp)
In 4QFY12, SBIN’s cost of deposits increased just ~75bp YoY
v/s 100bp+ YoY for peers, due to downward re-pricing of high
cost deposits.
Re-pricing of high cost deposits enabled SBIN to achieve
lowest increase in cost of term deposits in FY12.
Impact of 125bp CRR cut and capital infusion on NIM
Based on CRR of 6.0%
Assets
CRR
SLR
Advances
Fixed & other assets
Blended yield on funds
Liabilities
Total deposits
Borrowings
Networth & Other Liab.
Total cost of funds
NIM
% of B/S
6.0
31.0
60.0
3.0
100.0
% of B/S
85.0
5.0
10.0
100.0
Yields Blended yield
0.0
0.0
7.8
2.4
11.0
6.6
0.0
0.0
9.0
Cost Blended cost
5.8
4.9
7.5
0.4
0.0
0.0
5.3
3.7
Based on CRR of 4.75%
Assets
% of B/S
CRR
4.8
SLR
31.0
Advances
61.3
Fixed & other assets
3.0
Blended yield on funds 100.0
Liabilities
% of B/S
Total deposits
85.0
Borrowings
4.0
Networth & Other Liab. 11.0
Total cost of funds
100.0
NIM
Yields Blended yield
0.0
0.0
7.8
2.4
11.0
6.7
0.0
0.0
9.1
Cost Blended cost
5.8
4.9
7.5
0.3
0.0
0.0
5.2
3.9
Expect ~15bp NIM benefit from regulatory actions and capital infusion.
7 June 2012
12
13. State Bank of India
CASA ratio: Best among peers; challenges increased
What has changed?: Contrary to the declining trend for other PSBs, SBIN's CASA ratio has
been stable.
Market concern(s): Will the current CASA ratio sustain, especially amidst rising competition
in a deregulated environment?
Our view: Despite SA deregulation, the large banks have not raised SA deposit rates. A
rate war for SA deposits is unlikely. The number of branches that SBIN has added in the
last three years is equivalent to the total number of branches that its private sector
peers have. Its formidable branch network gives SBIN a significant competitive advantage.
Unlike peers, SBIN has been able to maintain CASA ratio at FY10 levels
Despite an elevated interest rate environment, SBIN has been able to maintain
its CASA ratio at levels similar to FY10. Its peers (ex-ICICIBC), on the other hand,
have reported a decline of 3-6pp in CASA ratio in last two years. The
outperformance was largely led by ~25% CAGR in savings accounts (SA) over FY0812 and moderating balance sheet growth over FY10-12.
While SA deposit growth moderated to 11% in FY12, the trend was similar for
most banks, given the elevated interest rate scenario.
Significant scope to improve SA deposits per branch
SBIN’s extensive network of 14,709 branches has enabled it to consistently garner
low cost CASA deposits and render stability to its deposit base. Nearly half its
CASA deposits come from rural and semi-urban areas, where SBIN remains the
most preferred bank. In these areas, SBIN has 65%+ CASA ratio.
Despite the strong CAGR in SBIN’s SA deposits, its SA deposits per branch are just
INR266m. Though SBIN beats its PSB peers on this parameter, it is behind its private
peers – INR327m for HDFCB, INR288m for ICICIBC and INR343m for AXSB. There is
further scope for SBIN to improve.
Rate war for SA deposits unlikely; formidable branch network a competitive
advantage
Deregulation of SA deposits had raised concerns about possible increase in banks’
cost of funds, led by increase in SA deposit rates. While a few smaller private
banks increased their SA deposit rates by 150-250bp, the larger banks refrained
from doing so, despite tight liquidity. This indicates that a rate war for SA deposits
is unlikely.
SBIN has added over 2,700 branches in the last three years (for ICICIBC and HDFCB,
the total branch network stands at 2,752 branches and 2,544 branches,
respectively). The incremental contribution of these branches is expected to
increase as they ride through the cycle of maturity.
7 June 2012
13
14. State Bank of India
CASA ratio among highest in industry; reaping benefits of strong liability profile
While most banks have reported sharp decline in CASA ratio since FY10, an extensive and diversified branch network has
enabled SBIN to maintain its CASA ratio.
(%)
Share of SA deposits in overall deposits highest in industry (%)
Despite the sharp rise in interest rates, increase in the share
of SA deposits in overall deposits is impressive.
SA CAGR among highest in industry (%)
Strong presence in rural and semi-urban areas, where SBIN
remains the most preferred bank, is leading to strong
accretion in SA deposits.
7 June 2012
(bps)
Share of CA deposits in overall deposits low as compared
to private peers (%)
Attractive term deposit schemes for corporates and higher
interest rates are leading to cannibalization of CA deposits.
Scope for improvement in branch productivity (INR m)
SBIN’s SA deposits per branch are the highest among PSBs,
but are lower than large private banks.
14
15. State Bank of India
Fee income: Granularity to ensure healthy growth
What has changed?: Unlike the past, fee income growth has moderated sharply.
Market concern(s): Fee income growth might remain muted.
Our view: We are not unduly pessimistic on fee income growth. We expect fee income to
grow at 15% over FY13-14.
Fee income growth moderated to 5% in FY12 v/s a CAGR of ~24% over
FY06-11; expect fee income to grow at 15% over FY13-14
In FY12, SBIN saw sharp moderation in fee income growth to 5% v/s a CAGR of
~24% over FY06-11. This was due to (1) the new management’s focus on margins
rather than on revenue enhancement through fees, and (2) moderation in growth.
SBIN has leveraged its strong corporate/government relationships and superior
liability franchise to build in granularity and diversity in its fee income streams. In
FY12, transaction-related fees constituted over 55% of its fee income and grew
over 20% even in the challenging macro environment of FY12.
~20% of SBIN’s fee income is not balance sheet linked – LCs, BGs, etc, where SBIN
is not very aggressive and growth has remained healthy at ~15%. The significant
moderation in fee income growth is largely due to lower loan processing charges.
With SBIN leveraging its strengths of balance sheet size, extensive branch network
and large net worth to gain higher share of corporate/government business,
traction in transaction banking should remain strong. Lower base of loan processing
fees would provide cushion to earnings.
While the growth in loan processing fees is likely to remain subdued, we expect
healthy 15-20% growth in other avenues of fee income (which are more granular).
Highly granular fee income base (%)
YoY growth in various fee income segments (%)
Fees to average assets highest among PSBs (%)
Factoring modest fee income growth
7 June 2012
15
16. State Bank of India
Capitalization: Tier-I higher than peers; likely to improve
What has changed?: Capitalization has improved significantly since FY11; now in a
comfortable position.
Market concern(s): Is the current capitalization sufficient to take care of two years' growth?
Our view: In the near term, we do not see capitalization as a threat to growth for SBIN.
Capitalization has improved significantly since FY11
Equity infusion of INR79b, strong internal accruals of INR89b (post dividend), and
the management's conscious effort to optimize use of capital has yielded results.
SBIN's capitalization has improved significantly since FY11 - CAR now stands at
13.9% (v/s 12% as at FY11), with tier-I ratio at 9.8% (v/s 7.8% as at FY11). SBIN's core
tier-I now stands at 9.6%, one of the highest amongst peers.
SBIN has transferred its export portfolio of INR300b to an Export Credit Guarantee
Scheme and SME portfolio to SIDBI's Credit Guarantee Trust Scheme (CGTS). It has
also aggressively pruned unused credit lines for capital release. Consequently,
while its balance sheet and loan book grew 9% and 15%, respectively, risk weighted
assets increased by just 2% in FY12.
Do not see capitalization as a threat to growth
The management's increased awareness on capital conservation is positive, and
would benefit the bank in the long term.
Apart from strong internal accruals (profit growth higher than balance sheet
growth), moderate growth and management's continuous efforts to utilize capital
efficiently will keep tier-I ratio healthy over FY13-14. In the near term, we do not
see capitalization as a threat to growth for SBIN.
Core tier-I ratio among the best in peers (%)
Strong internal accruals and management focus on conserving
capital will help keep core tier-I ratio at 9%+ over the next
two years.
7 June 2012
Increased focus on preserving capital (YoY growth; %)
While loans grew 14.7% and balance sheet grew 9.1% in FY12,
risk-weighted assets grew just 2%.
16
17. State Bank of India
Earnings: Healthy core operations, absence of one-off
provisions to drive strong growth
What has changed?: Core operating performance improved sharply, but this was besieged
by one-off provisions and trading losses.
Market concern(s): Volatility in asset quality could lead to significant volatility in earnings;
credit cost could surprise negatively.
Our view: SBIN is likely to achieve the highest profit growth among PSBs over FY12-14,
with (1) largely stable and superior NIM, (2) loan and fee income growth of 15%+, (3) high
operating leverage, and (4) absence of one-off expenses/provisions in FY13.
One-off provisions and trading losses overshadowed strong operating
performance
Superior margin performance (+50bp v/s stable/decline for peers in FY12) and
control over opex helped SBIN to post 40%+ earnings growth in FY12, on a lower
base.
The strong NIM performance was overshadowed by (1) higher slippages (core
credit cost of 115bp v/s average of 60bp over FY07-10), (2) moderation in fee
income, and (3) higher one-off provisioning (~INR23.7b), and (4) loss (MTM and
realized) on investments (INR15.8b), dragging down overall earnings growth. Oneoff provisions and losses together contributed ~20% of SBIN's FY12 PBT.
Building of additional capacity for future growth, coupled with higher wage
provisioning kept cost to core income ratio under pressure (50%+ over FY09-11).
While the balance sheet grew at a CAGR of 13% over FY09-11, operating
expenditure increased at 21%. As a result, cost to average assets remained high at
over 2% - one of the highest amongst peers. However, in FY12, opex grew at a
moderate pace of less than 15%, as a large part of the capex is behind.
SBIN likely to achieve highest profit growth among PSBs over FY12-14
SBIN is likely to achieve the highest profit growth among PSBs over FY12-14, with
(1) superior NIM performance, (2) loan and fee income growth of 15%+, (3) high
operating leverage, and (4) absence of one-off expenses/provisions (20% of FY12
PBT) in FY13.
Growth in operating expenses over FY09-11 should be viewed in context of
capacity addition for the next growth phase - SBIN added ~17,037 employees (8%
of FY09 base), ~2,100 branches (18% of FY09 base) and over 11,500 ATMs (1.3x FY09
network). The benefits of these investments will be visible in coming years. We
expect cost to average assets to decline gradually from 2.05% in FY12 to 1.95% in
FY14.
While the economic environment remains challenging, SBIN has taken a large
part of the pain upfront in FY11/12 and has not resorted to aggressive restructuring.
Contrary to perception, its net stress loans are the lowest among PSBs.
While proactive recognition of stressed assets places SBIN in a relatively better
position than peers, we continue to remain conservative in our assumption of
credit cost at similar level of FY12.
7 June 2012
17
18. State Bank of India
Conservatively factoring moderation in NIM (%)
NII growth is likely to moderate on a higher base.
Strong branch expansion...
Core operating profit to average assets (%)
Improvement in NIM and control over opex led to sharp
improvement in core operating profit.
…leading to higher opex over FY08-11
SBIN has added ~2,100 branches since FY09; ageing of the
branches will lead to higher productivity.
We expect core cost to income ratio to remain at ~48% even
after factoring in one-off provisions related to wage revisions
for FY13-14.
ed
dd
s a e)
e
nch
bas
b r a Y07
F
66
4 , 8 % of
(53
E
Negative net investment gain impacted FY12 PBT
Higher treasury losses (in addition to higher credit costs)
impacted earnings in FY12.
7 June 2012
E
Expect PAT CAGR of 25% over FY13-14
Strong core operations, absence of one-off provisions and
stable credit cost will drive earnings.
18
19. State Bank of India
Valuations: Trading at 20% discount to LPA
What has changed?: SBIN is trading at a discount of over 25% to its long-period average
(LPA) valuations.
Market concern(s): Macroeconomic environment remains challenging; Negative surprise
on asset quality can cap valuations. The stock is trading at a premium to other PSBs.
Our view: Strong core performance is likely to continue and we have been conservative
on credit cost estimates, which would provide a cushion, if asset quality surprises
negatively.
Trading at 20%+ discount to long-term average valuations; Buy
A challenging macroeconomic environment and asset quality issues over the last
couple of years have led to significant correction in valuations. SBIN is trading at a
discount of over 20% to its LPA valuations.
Strong core income performance is likely to continue and we have been
conservative on credit cost estimates, which would provide a cushion, if asset
quality surprises negatively.
Being a proxy to the Indian economy (25% market share), SBIN has historically
traded at a premium to other PSBs, despite its return ratios being lower. Over
FY12-14, SBIN's RoA and RoE are expected to converge with other PSBs.
We expect RoA to improve from 0.9% in FY12 to 1.1% by FY14 and RoE to improve
from 15.7% in FY12 to 17%+ by FY14. We retain SBIN as our top pick, with a price
target of INR2,725 (1.25x FY14E consolidated BV + INR102 for Insurance business).
Return ratios likely to improve
P/E (one-year forward): Trading at ~30% discount
7 June 2012
P/BV (one-year forward): Trading at ~20% discount
19
21. State Bank of India
DuPont Analysis: State Bank of India (%)
Sharp improvement in
core operating income
led by higher focus
on NIM
Operating expenses as a
percentage of average
assets significantly higher
than other PSBs
impacting RoA
Higher credit cost already
factored in our estimates
Return ratios expected to
improve over FY13-14
Avg. FY04-07
Net Interest Income
3.0
Fee income
0.9
Fee/Net Income Ratio
18.7
Core Operating Income
3.9
Operating Expenses
2.3
Cost/core Income ratio
59.8
Employee cost
1.6
Emp/Total Exp Ratio
68.7
Other operating expenses
0.7
Core Operating Profits
1.6
Non Interest Income (ex fees) 0.7
Operating Profits
2.3
Provisions
0.9
NPA provisions
0.4
Other Provisions
0.5
PBT
1.4
Tax
0.5
Tax Rate
34.2
RoA
0.9
Leverage
19.2
RoE
17.9
FY08
2.6
0.9
23.2
3.6
2.0
54.9
1.2
61.8
0.7
1.6
0.4
2.0
0.4
0.3
0.1
1.6
0.6
35.5
1.0
16.0
16.8
FY09
2.5
0.9
22.7
3.4
1.9
54.9
1.2
62.3
0.7
1.5
0.6
2.1
0.4
0.3
0.1
1.7
0.6
35.7
1.1
15.8
17.1
FY10
2.3
1.0
25.1
3.3
2.0
60.9
1.3
62.8
0.7
1.3
0.5
1.8
0.4
0.5
0.0
1.4
0.5
34.2
0.9
16.3
14.8
FY11
2.9
1.0
24.1
3.9
2.0
52.1
1.3
66.1
0.7
1.9
0.4
2.2
0.9
0.7
0.2
1.3
0.6
44.7
0.7
17.4
12.6
FY12
3.4
0.9
21.0
4.3
2.0
47.1
1.3
65.1
0.7
2.3
0.2
2.5
1.0
0.9
0.1
1.4
0.5
36.7
0.9
17.2
15.7
FY13E FY14E
3.3
3.1
1.0
1.0
21.3
21.9
4.3
4.1
2.1
2.0
48.2
47.6
1.3
1.2
64.9
63.8
0.7
0.7
2.2
2.1
0.3
0.3
2.5
2.4
0.8
0.7
0.7
0.7
0.1
0.1
1.7
1.7
0.6
0.6
36.0
35.0
1.1
1.1
16.0
16.3
17.2
17.9
Source: MOSL
Acronyms and abbreviations used in this report (arranged alphabetically)
AI: Air India
AXSB: Axis Bank
BG: Bank Guarantee
BOB: Bank of Baroda
CAGR: Compounded Annual Growth Rate
CAR: Capital Adequacy Ratio
CASA: Current and Savings Accounts
CRR: Cash Reserve Ratio
GoI: Government of India
HDFCB: HDFC Bank
ICICIBC: ICICI Bank
LC: Letter of Credit
LPA: Long Period Average
MoM: Month-on-Month
MTM: Marked To Market
7 June 2012
NII: Net Interest Income
NIM: Net Interest Margin
NNPA: Net Non-Performing Asset
NW: Net Worth
OSRL: Outstanding Standard Restructured Loan
PBT: Profit Before Tax
PCR: Provision Coverage Ratio
PSB: Public Sector Bank
QoQ: Quarter-on-Quarter
RWA: Risk-Weighted Assets
SA: Savings Accounts
SBIN: State Bank of India
SEB: State Electricity Board
SME: Small and Medium Enterprises
YoY: Year-on-Year
21
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Disclosure of Interest Statement
1. Analyst ownership of the stock
2. Group/Directors ownership of the stock
3. Broking relationship with company covered
4. Investment Banking relationship with company covered
State Bank of India
No
Yes
Yes
No
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