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SBI: Margins remain firm

Jan 22, 2011

SBI declared its 3QFY11 results. The bank has reported 43% YoY growth in net interest income while its net profits have grown by 14% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 44% YoY in 9mFY11 on the back of 22% YoY growth in advances.
  • Net interest margins improve from 2.6% in 9mFY10 to 3.4% in 9mFY11 led by robust growth in low cost deposit base (CASA).
  • Cost to income ratio reduces from 52% in 9mFY10 to 46% in 9mFY11 due to write back of employee cost provisioning.
  • Gross NPAs rise to 3.2% from 3.1% in 9mFY10 while net NPAs remain at 1.6%.
  • Capital adequacy ratio at 13.2% (as per Basel II) at the end of 9mFY11. Capital raising scheduled in FY12.

Standalone financials
Rs (m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Interest Income 177,796 214,127 20.4% 530,283 596,730 12.5%
Interest Expense 114,633 123,630 7.8% 360,783 352,046 -2.4%
Net Interest Income 63,163 90,497 43.3% 169,500 244,684 44.4%
NIM (%)       2.6% 3.4%  
Other Income 33,657 33,139 -1.5% 104,596 110,091 5.3%
Other Expense 50,638 55,992 10.6% 142,825 162,216 13.6%
Provisions and contingencies 8,566 20,515 139.5% 20,454 62,244 204.3%
Profit before tax 37,616 47,129 25.3% 110,817 130,315 17.6%
Tax 12,824 18,849 47.0% 37,821 47,878 26.6%
Profit after tax/ (loss) 24,792 28,280 14.1% 72,996 82,437 12.9%
Net profit margin (%) 13.9% 13.2%   13.8% 13.8%  
No. of shares (m)         635.0  
Book value per share (Rs)*         1,137.6  
P/BV (x)         2.3  
* (Book value as on 31st December 2010)

What has driven performance in 9mFY11?
  • Despite having low cost deposits (CASA) of the size of the balance sheets of smaller banks in India, SBI managed to grow the same by 28% YoY in 9mFY11. In fact most of the bankís deposit growth in the past 9 months came in from low cost accounts. The countryís largest bank continued to reap the advantage of having the largest franchise. Also it managed to garner some large corporate salary accounts and added to its CASA base this fiscal. What further helped buoy the net interest margins (NIM) of the bank were the re-pricing of term and bulk deposits. While the former were re-priced as much as 3% lower, most of the bulk deposits were retired. The re-pricing helped SBI improve NIMs substantially during the last 12 months. Interestingly, SBIís CASA base is now bigger than the balance sheet size of 50% of banks in India. In rural deposits the proportion of CASA stood at 58%, signifying the impact of financial inclusion.

    Going forward, however, the bank may see pressure on margins due to the upward revision of deposit costs.

    Retail focus...
    (Rs m) 9mFY10 % of total 9mFY11 % of total Change
    Advances 6,071,540   7,399,710   21.9%
    Agriculture †611,580 10.1% †712,810 9.6% 16.6%
    International †938,680 15.5% 1,105,620 14.9% 17.8%
    Retail 2,666,470 43.9% 3,281,490 44.3% 23.1%
    SME 1,029,380 17.0% 1,241,780 16.8% 20.6%
    Large corporates †825,430 13.6% 1,058,010 14.3% 28.2%
    Deposits 7,361,590   8,333,610   13.2%
    CASA 3,083,580 41.9% 3,937,910 47.3% 27.7%
    Term deposits 4,278,010 58.1% 4,395,700 52.7% 2.8%
    Credit/Deposit 82.5%   88.8%    

  • The bankís fee income showed a growth of 13% YoY, bringing the fee to total income ratio to 22% in 9mFY11 (same as 9mFY10).

  • Additional hiring combined with additional contribution for pension as well as wage revision had led to the sharp uptick in the cost to income ratio of the bank in FY10. The ratio reduced from 52% in 9mFY10 to 46% in 9mFY11 due to write back of employee cost provisioning.

  • SBI did feel the heat on its NPAs in the past 12 months with gross NPAs rising to 3.2% of advances from 3.1% in 9mFY10. This included the Gross NPAs of State Bank of Indore which stood at 3.9% of advances at the end of FY10. Net NPAs remained at 1.6% (1.9% in 9mFY10). The slippages under the RBIís restructured assets scheme stood at 15.7% at the end of December 2010. Also, the bank does foresee some delinquency risks in its SME and retail loan books going forward. The provision coverage ratio stood at around 64% in 9mFY11 and the bank needs to bring it up to 70% by 1HFY12.

What to expect?
At the current price of Rs 2,597, the stock is trading at 1.6 times our estimated FY13 standalone adjusted book value. SBIís loan growth and margins in 9mFY11 have been marginally higher than our estimates for the fiscal. Although we anticipate moderate growth in balance sheet in the near term, the bank, given its balance sheet size, penetration and the possibility of merger with associates remains a preferred play for the long term. Having said that the high delinquency rate is our biggest concern with regard to the bank. Also most of the medium term upsides (ResearchPro subscribers can view latest updates here) are already priced in.

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