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SBI: NPAs, NIMs show uptick
Feb 14, 2012

State Bank of India (SBI) declared its results for the third quarter of the financial year 2011-12 (3QFY12). The bank has reported 29% YoY growth in interest income and 15% YoY growth in net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 27% YoY in 3QFY12, on the back of a 17.5% YoY growth in advances.
  • Other income falls by 36% YoY in 3QFY12 on the back of lower fee income, forex income and loss on sale of investments.
  • NIMs (net interest margins) move up significantly from 3.4% in 9mFY11 to 3.8% in 9mFY12, as the bank was able to improve its yields and control costs.
  • Net NPAs (Non Performing Assets) increased from 1.6% in 9mFY11 to 2.22% in 9mFY12.
  • Net profit rises by 15% YoY in 3QFY12 on a strong growth in NII and lower taxes, despite lower other income. For the nine month period, net profits fall by 7.1% YoY.
  • Capital adequacy ratio stood at 11.6% (Tier-1 ratio at 7.59%) at the end of 3QFY12 as per Basel II.


Rs (m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Interest income 214,128 276,614 29.2% 596,730 778,260 30.4%
Interest expense 123,630 161,956 31.0% 352,047 462,386 31.3%
Net Interest Income 90,498 114,659 26.7% 244,684 315,873 29.1%
Net interest margin (%)       3.4% 3.8%  
Other Income 33,139 21,260 -35.8% 110,091 90,874 -17.5%
Other Expense 55,992 63,318 13.1% 162,216 186,980 15.3%
Provisions and contingencies 20,515 24,074 17.3% 62,244 99,498 59.9%
Profit before tax 47,130 48,526 3.0% 130,315 120,269 -7.7%
Tax 18,849 15,895 -15.7% 47,879 43,699 -8.7%
Profit after tax/ (loss) 28,281 32,630 15.4% 82,436 76,570 -7.1%
Net profit margin (%) 13.2% 11.8%   13.8% 9.8%  
No. of shares (m)         635.0  
Book value per share (Rs)*         1134.0  
P/BV (x)         1.9  
* (Book value as on 31st December 2011)

What has driven performance in 9mFY12?
  • Despite having low cost deposits (CASA-current account and savings account) of the size of the balance sheets of smaller banks in India, SBI managed to grow the same by 12% YoY in 9mFY12. In fact, a large chunk of the bank's deposit growth in the past year came in from low cost savings accounts. The country's largest bank continued to reap the advantage of having the largest franchise of bank branches in the country. Its financial inclusion initiatives, especially ‘no-frills' accounts helped contribute to the increase. Despite the recent savings bank deregulation, the bank has no plans as of now to increase its deposit rates. It does not feel threatened from a flight of capital to other banks because of its large franchise, and diversified deposit base.

  • With regards to net interest margins (NIM), these saw a strong improvement of 0.4% coming to 3.8% at the end of 9mFY12 from 3.4% at the end of 9mFY11. The bank saw an improvement in its yield on advances, which came in higher than the increase in costs of funds. This was due to its huge CASA base, the proportion which (to total deposits) was at a high 44.7% in 9mFY12. The bank has so far exceeded its NIM target for FY12, which was estimated at 3.5%. Advance growth was seen across segments and especially in the SME and international segments. SBI maintaind its leadership position in the home loan space, and continues to see strong growth in auto loans. The management is targeting 16-18% loan growth for the full year.

    SME and international advances stay strong
    (Rs m) 9mFY11 % of total 9mFY12 % of total Change
    Advances 7,399,710   8,693,930   17.5%
    Agriculture 870,250 11.8% 1,018,820 11.7% 17.1%
    International 1,105,620 14.9% 1,340,630 15.4% 21.3%
    Retail 1,566,930 21.2% 1,753,220 20.2% 11.9%
    Home Loans 851,420 11.5% 990,190 11.4% 16.3%
    Auto Loans 140,120 1.9% 174,090 2.0% 24.2%
    SME 1,093,620 14.8% 1,326,770 15.3% 21.3%
    Large Corporates 1,058,010 14.3% 1,231,180 14.2% 16.4%
    Deposits 8,789,790   10,009,650   13.9%
    CASA 3,994,070 45.4% 4,473,580 44.7% 12.0%
    Tem deposits 4,339,540 49.4% 4,940,740 49.4% 13.9%
    Credit deposit ratio 84.2%   86.9%    

  • The bank's fee income showed an increase of 0.6% YoY, bringing the fee to total income ratio to 19% in 9mFY12 (22% in 9mFY11). However, due to lower profit on sale of investments, and dividend income (a conscious effort not to take much dividend from subsidiaries), other income saw a 17.5% YoY decline in 9mFY12. There were also some one-off items seen in the last year period.

  • The bank's capital adequacy came down to 11.6%, with its Tier-1 ratio at 7.59% at the end of December 2011, compared to 12.1% last year. In order for the bank to achieve asset growth, a further capital addition is necessary. The government is expected to provide a Rs 79 bn capital infusion into the bank by the end of March 12.

  • Where the bank did see a slip up this time around was on the provisioning account. Provisions increased by 60%. A large chunk out of the increased provisions on loan loss and standard assets was on account of the RBI's increased provisioning norms, for various classes of assets. The bank also saw an increase in investment depreciation, especially on bonds, domestic equities and mutual funds.

    Breakup of provisions
    Rs (m) 9mFY11 9mFY12 Change
    Loan Loss 55,282 87,090 57.5%
    Investment depreciation 3,423 6,363 85.9%
    Standard assets 3,455 6,039 74.8%
    Others 84 6 -93.5%
    Total 62,244 99,498 59.9%

  • SBI felt the heat on its NPAs with gross NPAs rising to 4.6% of advances in 9mFY12 from 3.2% in 9mFY11. Net NPAs also deteriorated to 2.2% (1.6% in 9mFY11), despite increased provisioning. The Bank has reached a provision coverage ratio of 62.5% in 9mFY12, compared to 64.1% at the end of 9mFY11. The large Kingfisher account was treated as an NPA. The bank has an around Rs 11.5 bn exposure to Air India which is on a fully secured cash credit basis.

  • Slippages under the RBI's restructured assets scheme stood at 25.8% at the end of December 2011. Slippages to restructured book from April-Dec 2011 amounted to Rs 18.3 bn. There was a huge spike in the NPAs in the agricultural book which increased from 6.4% (FY11) to 9.5% of advances in 9mFY12. The mid-corporate segment also saw a spike in NPA levels, and it has been seeing the maximum stress in this counter. Almost every other category also saw a spike in NPA accounts, and even large corporate slipped into the NPA category (mainly Kingfisher Airlines). Delinquencies were also higher in export related categories, and the bank expects some stress on accounts which export luxury goods to the European region. The bank has a 8.7% exposure to the infra sector, out of which only 4.5% is to the power sector and it does not have much exposure to SEBs. However, with the current macro environment, and high rates still prevailing in the market, further stresses cannot be ruled out on the overall book.

What to expect?
At the current price of Rs 2,198, the stock is valued at 1.7 times our estimated FY14 adjusted book value. The bank has seen a robust performance on the core business front, with a health growth in NII and a sustained improvement in margins. The bank has been able to increase its NIMs even in light of a rising interest rate environment on account of its large CASA base and huge franchise. Now with the RBI expected to cut rates, it may see even more margin expansion and core income growth. However, profit growth for the nine months has still come in below par on account of its lackluster performance in the first quarter. Higher NPA provisioning in order to meet RBI guidelines, as well as on account of increase slippages impacted profits this quarter. However, on the plus side, the bank does not have any unamortized pension on its books, which most of its peers still hold.

We have factored in a slowdown in balance sheet growth over the next few years, on account of a moderation in credit growth, with high prevailing rates etc. There may be some further pains going forward on the NPA front, with incremental slippages seeing an increase. Capital concerns have been allayed temporarily; however the bank will still need some more capital in FY13-14 to sustain growth. At the current valuations we have a cautious view on the stock. We will have to revisit some of our estimates on the capital front and on asset quality.

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