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SBI: Bad loans under control - Views on News from Equitymaster
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SBI: Bad loans under control
Feb 13, 2015

State Bank of India (SBI) declared its results for the third quarter (3QFY15) and nine months (9mFY15) of the financial year 2014-15. The net interest income for the quarter grew by 9% YoY while the net profits grew by 30% YoY. For the nine month period, the profits grew 19% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 10.6% YoY in 3QFY15 on the back of a 6.9% YoY growth in gross advances.
  • Other income grew sharply by 24% YoY.
  • NIMs (net interest margins) came down from 3.2% in 9mFY14 to 3.1% in 9mFY15.
  • Net NPAs (Non Performing Assets) fell from 3.2% in 3QFY14 to 2.8% in 3QFY15 thus providing some relief.
  • Net profits grew by a strong 30% YoY on the back of a 9% growth in net interest income and the strong growth in other income. Lower taxes also played a significant role in boosting profits
  • Capital adequacy ratio stood at 12.03% at the end of 9MFY15 as per Basel III norms.

Rs (m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
Interest income 348,531 385,462 10.6% 1,004,932 1,122,959 11.7%
Interest expense 222,367 247,695 11.4% 641,138 719,924 12.3%
Net Interest Income 126,165 137,767 9.2% 363,794 403,035 10.8%
Net interest margin (%)       3.2% 3.1%  
Other Income 42,148 52,378 24.3% 119,673 140,606 17.5%
Other Expense 92,128 97,200 5.5% 268,652 278,600 3.7%
Provisions and contingencies 41,496 52,349 26.2% 100,442 130,066 29.5%
Profit before tax 34,689 40,596 17.0% 114,372 134,975 18.0%
Tax 12,345 11,495 -6.9% 35,868 41,380 15.4%
Profit after tax/ (loss) 22,343 29,101 30.2% 78,504 93,596 19.2%
Net profit margin (%) 6.4% 7.5%   7.8% 8.3%  
No. of shares (m)         7465.7  
Book value per share (Rs)*         144.9  
P/BV (x)         2.1  
* (Book value as on 30th September 2014)

What has driven performance in 3QFY15?
  • As much as the new statistics would like us to believe, things have not really improved for the Indian economy that much if the results of SBI are any indication. In fact, even the bank's management expressed doubts over the recovery of the economy and hinted the pain might last for another couple of quarters.

  • Coming to the specifics, the net interest income for the bank grew at decent 9% YoY for 3QFY15 on the back of 6.9% YoY growth in advances during the quarter. The loan growth was a bit of a disappointment as it came lower than the industry growth rate of about 10% in the same period. The margins for the whole bank have come down to 3.12% in 3QFY15 slightly lower as compared to 3.19% in the same period a year ago. Thus, there has been some disappointment on both the loan growth as well as net interest margin front.

  • On account of the lower than industry's growth rate in terms of advances, the company's market share fell marginally from 16.6% to 16.1% on a YoY basis. The loan book expansion came largely from retail (13% YoY growth) and large corporate (20% YoY growth)

    Large corporates, retail and agri advances stay strong
    (Rs m) 3QFY14 % of total 3QFY15 % of total Change
    Advances 11,837,320   12,654,830   6.9%
    Agriculture 1,234,470 10.4% 1,595,370 12.6% 29.2%
    Retail 2,308,270 19.5% 2,602,260 20.6% 12.7%
    Home Loans 1,351,290 11.4% 1,529,050 12.1% 13.2%
    Auto Loans 276,980 2.3% 307,010 2.4% 10.8%
    SME 1,681,120 14.2% 1,679,420 13.3% -0.1%
    Mid Corp 2,213,930 18.7% 2,206,830 17.4% -0.3%
    Large Corporates 1,996,580 16.9% 2,396,180 18.9% 20.0%
    Deposits 13,499,400   15,100,770   11.9%
    CASA 5,523,850 40.9% 6,036,370 40.0% 9.3%
    Tem deposits 7,062,370 52.3% 8,140,950 53.9% 15.3%
    Credit deposit ratio 87.7%   83.8%    

  • The deposits for the bank grew at 12.0% YoY and the term deposits grew at higher rate of 15.3% YoY during 3QFY15. The CASA deposits growth at 9.3% YoY was backed by similar increase both in current account as well as savings account. However, the CASA ratio for the December quarter 2014 fell down to 42.6% from 43.9% a year ago.

  • Highlight of the quarter was the strong show put up by the other income component which managed to grow by a strong 24% YoY during the quarter. The fee income growth came in at 11% YoY whereas the growth for all the other non-core components of other income stood at a robust 57% YoY.

  • The operating efficiency of SBI got a good boost during the quarter. The cost to income ratio for the bank fell from 55% in 3QFY14, to a more comfortable 51%.

  • The December quarter of FY15 witnessed an improvement in asset quality of the bank vis a vis the same quarter last year. The gross NPAs fell from 5.7% in December 2013 quarter to 4.9% in the quarter ended December 2014. The net NPAs too fell to 2.8% in 3QFY15 from 3.2% in 3QFY14. The respite came also on the fresh slippages front, wherein the number declined to Rs 70 bn during 3QFY15 from Rs 114 bn in 3QFY14. Some amount of economic revival seems to have aided in arresting slippages.

  • The provisioning costs also mellowed down a bit, but still going up by 26% YoY during the quarter and 29% YoY during the nine month period.
What to expect?
At the current price of Rs 306 the stock of SBI is trading at around 1.7 times the FY17 estimates.

We do expect an improvement in SBI's performance on the asset quality front, and believe that SBI definitely has an edge over its PSU banking peers in terms of balance sheet growth and margins. Hence, the bank could offer upside to investors once the investment cycle picks up. Nevertheless, given the size of restructured loan portfolio, its valuations continue to warrant caution. Therefore, we reiterate our view that investors should consider buying the stock at Rs 200 or lower (adjusted for stock split).

DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
INTRODUCTION:
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group.
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  1. Quantum Information Services Private Limited (QIS) having its registered office at 103, Regent Chambers, Nariman Point, Mumbai 400021 is registered under SEBI (Investment Advisers) Regulations, 2013 vide Registration No. INA000000680. QIS provides information on mutual funds and personal financial planning, financial markets in general, and services related to financial planning and research in various financial instruments including mutual funds, insurance and fixed income products to customers. It offers asset allocation and researched investment recommendations through its financial planning services through its website www.personalfn.com
  2. Agora Holdings (Cyprus) Limited having its registered office at Akropolis, 59-61, 3rd Floor, Office 301 Strovolos 2012 Nicosia Cyprus belongs to Agro group (Agora) which owns www.agora-inc.com and is one of the largest and most successful consumer newsletter publishers in the world.
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DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
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DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
INTRODUCTION:
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group.
BUSINESS ACTIVITY:
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.
DISCIPLINARY HISTORY:
There are no outstanding litigations against the Company, it subsidiaries and its Directors.
GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:
For the terms and conditions for research reports click here.
DETAILS OF ASSOCIATES:
  1. Quantum Information Services Private Limited (QIS) having its registered office at 103, Regent Chambers, Nariman Point, Mumbai 400021 is registered under SEBI (Investment Advisers) Regulations, 2013 vide Registration No. INA000000680. QIS provides information on mutual funds and personal financial planning, financial markets in general, and services related to financial planning and research in various financial instruments including mutual funds, insurance and fixed income products to customers. It offers asset allocation and researched investment recommendations through its financial planning services through its website www.personalfn.com
  2. Agora Holdings (Cyprus) Limited having its registered office at Akropolis, 59-61, 3rd Floor, Office 301 Strovolos 2012 Nicosia Cyprus belongs to Agro group (Agora) which owns www.agora-inc.com and is one of the largest and most successful consumer newsletter publishers in the world.
  3. Common Sense Living Private Limited (CSL) owns www.commonsenseliving.co.in and is an initiative that provides straightforward lifestyle and wealth-building ideas from wealth coach Mark Ford. CSL is 100% subsidiary Company of Equitymaster.
DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
  1. Equitymaster has financial interest in the subject company.
  2. Equitymaster's Associates, Research Analyst or his/her relative have no financial interest in the subject company.
  3. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
  4. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
  1. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
  2. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
  3. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  4. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  5. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
GENERAL DISCLOSURES:
  1. The Research Analyst has not served as an officer, director or employee of the subject company.
  2. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
Definitions of Terms Used:
  1. Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
  4. Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
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