634747546547583299

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634747546547583299

  1. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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
  20. 20. FY07-11 Net Interest Income 2.6 Fee income 0.9 Fee/Net Income Ratio 23.4 Core Operating Income 3.6 Operating Expenses 2.0 Cost/core Income ratio 56.3 Employee cost 1.3 Emp/Total Exp Ratio 64.1 Other operating expenses 0.7 Core Operating Profits 1.6 Other Income (ex fees) 0.5 Operating Profits 2.0 Provisions 0.5 NPA provisions 0.4 Other Provisions 0.1 PBT 1.5 Tax 0.6 Tax Rate (%) 37.8 RoA 0.9 Leverage 16.7 RoE 15.4 FY13/14 MOSL estimates Comparative Dupont Analysis (%) SBIN FY12 FY13 3.4 3.3 0.9 1.0 21.0 21.3 4.3 4.3 2.0 2.1 47.1 48.2 1.3 1.3 65.1 64.9 0.7 0.7 2.3 2.2 0.2 0.3 2.5 2.5 1.0 0.8 0.9 0.7 0.1 0.1 1.4 1.7 0.5 0.6 36.7 36.0 0.9 1.1 17.2 16.0 15.7 17.2 FY14 FY07-11 3.1 3.2 1.0 0.7 21.9 14.8 4.1 3.9 2.0 1.9 47.6 49.7 1.2 1.3 63.8 67.5 0.7 0.6 2.1 2.0 0.3 0.5 2.4 2.5 0.7 0.6 0.7 0.4 0.1 0.2 1.7 1.9 0.6 0.6 35.0 33.9 1.1 1.3 16.3 17.8 17.9 22.3 PNB FY12 FY13 3.2 3.1 0.6 0.6 14.6 14.8 3.8 3.7 1.7 1.7 43.8 45.0 1.1 1.1 67.5 66.7 0.5 0.6 2.1 2.0 0.4 0.3 2.5 2.4 0.9 0.8 0.6 0.6 0.3 0.1 1.7 1.6 0.5 0.5 30.6 32.0 1.2 1.1 18.0 17.3 21.0 18.9 FY14 FY07-11 3.1 2.6 0.6 0.6 14.6 14.9 3.7 3.1 1.6 1.7 43.4 55.0 1.0 1.1 64.6 63.6 0.6 0.6 2.1 1.4 0.3 0.6 2.4 2.0 0.8 0.4 0.6 0.2 0.2 0.2 1.6 1.6 0.5 0.5 32.0 31.3 1.1 1.1 17.3 18.3 19.3 19.5 BoB FY12 FY13 2.6 2.5 0.4 0.4 13.1 13.0 3.0 2.9 1.3 1.2 42.6 42.0 0.7 0.7 57.9 56.4 0.5 0.5 1.7 1.7 0.4 0.4 2.1 2.1 0.6 0.6 0.4 0.5 0.2 0.1 1.5 1.5 0.3 0.4 16.9 29.0 1.2 1.0 17.8 17.4 22.1 18.2 FY14 FY07-11 2.5 2.6 0.4 0.7 13.0 17.3 2.9 3.2 1.2 1.7 41.4 51.6 0.7 1.1 54.8 63.6 0.5 0.6 1.7 1.6 0.4 0.5 2.1 2.1 0.6 0.7 0.5 0.4 0.1 0.2 1.4 1.4 0.4 0.4 30.0 27.5 1.0 1.0 17.6 21.5 17.5 22.1 BoI FY12 2.3 0.5 15.7 2.8 1.3 48.7 0.8 61.8 0.5 1.4 0.4 1.8 0.8 0.6 0.3 1.0 0.2 25.2 0.7 20.7 15.0 FY13 2.4 0.5 15.5 2.9 1.3 46.9 0.8 61.0 0.5 1.5 0.4 1.9 0.8 0.6 0.1 1.1 0.3 30.0 0.8 19.8 15.0 FY14 FY07-11 2.3 2.4 0.5 0.6 15.5 18.0 2.8 3.0 1.3 1.6 47.0 51.2 0.8 1.0 60.6 62.6 0.5 0.6 1.5 1.5 0.3 0.5 1.8 2.0 0.7 0.6 0.6 0.4 0.1 0.2 1.1 1.4 0.4 0.3 32.0 18.9 0.8 1.1 20.3 20.8 15.5 22.8 CBK FY12 FY13 FY14 2.2 2.3 2.2 0.5 0.5 0.5 17.0 16.1 16.4 2.7 2.8 2.7 1.3 1.4 1.3 49.2 49.3 47.3 0.8 0.9 0.8 63.6 64.0 61.8 0.5 0.5 0.5 1.4 1.4 1.4 0.3 0.3 0.3 1.7 1.7 1.7 0.5 0.6 0.6 0.4 0.5 0.5 0.2 0.1 0.1 1.2 1.1 1.1 0.2 0.2 0.2 19.6 20.0 20.0 0.9 0.9 0.9 18.4 18.2 18.4 17.0 15.7 16.2 Source: MOSL State Bank of India 7 June 2012 20
  21. 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
  22. 22. State Bank of India Financials and Valuation Income Statement (INR Million) Y/E March 2009 Interest Income 637,884 Interest Expense 429,153 Net Interest Income 208,731 Change (%) 22.6 Non Interest Income 126,908 Net Income 335,639 Change (%) 30.5 Operating Expenses 156,487 Pre Provision Profits 179,152 Change (%) 36.7 Provisions (excl tax) 37,346 PBT 141,806 Tax 50,594 Tax Rate (%) 35.7 PAT 91,212 Change (%) 35.5 Consolidated PAT post MI 109,553 Change (%) 22.3 *Core PPP is (NII+Fee income-Opex) 2010 709,939 473,225 236,714 13.4 149,682 386,396 15.1 203,187 183,209 2.3 43,948 139,261 47,600 34.2 91,661 0.5 117,338 7.1 2011 2012 2013E 2014E 813,944 1,065,215 1,175,578 1,314,831 488,680 632,304 701,940 789,509 325,264 432,911 473,638 525,322 37.4 33.1 9.4 10.9 158,246 143,515 181,067 205,863 483,510 576,425 654,706 731,185 25.1 19.2 13.6 11.7 230,154 260,690 295,226 326,563 253,356 315,735 359,480 404,621 38.3 24.6 13.9 12.6 103,813 130,902 117,694 121,254 149,542 184,833 241,786 283,367 66,897 67,760 87,043 99,179 44.7 36.7 36.0 35.0 82,645 117,073 154,743 184,189 -9.8 41.7 32.2 19.0 106,850 153,431 193,237 230,066 -8.9 43.6 25.9 19.1 Balance Sheet Y/E March Equity Share Capital Reserves & Surplus Net Worth Deposits Change (%) of which CASA Dep Change (%) Borrowings Other Liabilities & Prov. Total Liabilities Current Assets Investments Change (%) Loans Change (%) Fixed Assets Other Assets Total Assets (INR Million) 2009 6,349 573,128 579,477 7,420,731 38.1 3,089,778 22.4 840,579 803,533 9,644,321 1,044,038 2,759,540 45.6 5,425,032 30.2 38,378 377,333 9,644,321 2010 6,349 653,143 659,492 8,041,162 8.4 3,800,397 23.0 1,030,116 803,367 10,534,137 861,887 2,957,852 7.2 6,319,142 16.5 44,129 351,128 10,534,137 2011 6,350 643,510 649,860 9,106,740 13.3 4,615,214 21.4 1,195,690 1,285,072 12,237,362 1,228,741 2,956,006 -0.1 7,567,194 19.8 47,642 437,778 12,237,362 2012 6,710 832,802 839,512 10,436,474 14.6 4,879,890 5.7 1,270,056 809,151 13,355,192 971,632 3,121,976 5.6 8,675,789 14.7 54,666 531,130 13,355,192 2013E 6,710 952,360 959,070 12,106,309 16.0 5,551,659 13.8 1,425,299 930,729 15,421,407 1,067,383 3,590,273 15.0 10,063,915 16.0 62,481 637,356 15,421,407 2014E 6,710 1,094,709 1,101,419 14,285,445 18.0 6,318,172 13.8 1,602,221 1,073,864 18,062,949 1,223,058 4,128,813 15.0 11,875,420 18.0 70,831 764,827 18,062,949 157,140 96,774 2.86 1.78 38.4 57.0 195,349 108,702 3.05 1.72 44.4 59.2 253,263 123,469 3.29 1.63 51.2 65.0 396,763 158,187 4.45 1.82 60.1 68.1 508,170 171,840 4.89 1.71 66.2 71.7 622,228 186,202 5.05 1.57 70.1 74.2 Asset Quality GNPA (INR m) NNPA (INR m) GNPA Ratio NNPA Ratio PCR (Excl Tech. write off) PCR (Incl Tech. Write off) E: MOSL Estimates 7 June 2012 (%) 22
  23. 23. State Bank of India Financials and Valuation Ratios Y/E March Spreads Analysis (%) Avg. Yield-Earning Assets Avg. Yield on loans Avg. Yield on Investments Avg. Cost-Int. Bear. Liab. Avg. Cost of Deposits Interest Spread Net Interest Margin 2009 2010 2011 2012E 2013E 2014E 8.3 9.7 6.7 6.0 5.9 2.3 2.7 7.8 8.6 6.2 5.5 5.6 2.3 2.6 8.0 8.6 6.7 5.0 5.0 3.0 3.2 9.2 10.0 7.9 5.7 5.7 3.5 3.8 8.9 9.6 7.8 5.6 5.5 3.4 3.6 8.6 9.2 7.5 5.4 5.3 3.2 3.4 Profitability Ratios (%) RoE RoA Consolidated ROE Consolidated ROA 17.1 1.1 16.7 1.0 14.8 0.9 15.4 0.9 12.6 0.7 13.4 0.7 15.7 0.9 16.8 0.9 17.2 1.1 17.6 1.0 17.9 1.1 18.1 1.0 Efficiency Ratios (%) Cost/Income* Empl. Cost/Op. Exps. Busi. per Empl. (Rs m) NP per Empl. (Rs lac) 54.9 62.3 58.1 4.7 60.9 62.8 67.0 4.5 52.1 66.1 73.3 3.9 47.1 65.1 81.6 5.3 48.2 64.9 94.7 7.1 47.6 63.8 108.4 8.3 913 17.5 1,039 13.8 1,023 -1.5 1,140 17.6 1,309 14.8 1,315 0.4 806 919 887 1,022 1,157 1,141 143.7 34.8 144.4 0.5 130.2 -9.9 172.6 21.6 184.8 7.1 168.3 -9.0 29.0 30.0 30.0 1,251 22.2 1.7 1,583 20.4 1.3 1,086 1.9 1,363 1.5 174.5 34.0 11.9 228.6 35.9 9.1 35.0 1.7 1,429 14.2 1.5 1,819 14.9 1.1 1,250 1.7 1,580 1.3 230.6 32.2 9.0 288.0 25.9 7.2 44.8 2.2 1,641 14.8 1.3 2,099 15.4 0.9 1,447 1.4 1,840 1.1 274.5 19.0 7.6 342.9 19.1 6.1 53.3 2.6 Valuation Book Value (INR) BV Growth (%) Price-BV (x) Consol BV (INR) BV Growth (%) Price-Consol BV (x) Adjusted BV (INR) Price-ABV (x) Adjusted Consol BV Price-Consol ABV (x) EPS (INR) EPS Growth (%) Price-Earnings (x) Consol EPS (INR) Con. EPS Growth (%) Price-Concol EPS (x) Dividend Per Share (INR) Dividend Yield (%) E: MOSL Estimates 7 June 2012 23
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