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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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
Disclosures
This report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement
to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been
furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form.
Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates
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or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
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or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness
for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.
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Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.
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

Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or
will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible
for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

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For U.K.
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which this document relates is only available to investment professionals and will be engaged in only with such persons.

For U.S.
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Motilal Oswal has entered into a chaperoning agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo").
This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional
investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major
institutional investors and will be engaged in only with major institutional investors.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, Marco
Polo and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.

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  • 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
  • 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. 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. 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. 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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