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SBI: Profits down by a third
Feb 15, 2014 | Updated on Feb 18, 2014

State Bank of India (SBI) declared its results for the third quarter of the financial year 2013-14 (3QFY14). The net interest income for the quarter grew by 13.1% YoY while the net profit shrunk by almost 34.2% YoY. For the nine month period, the profits declined 27.3% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 13.1% YoY in 3QFY14 on the back of a 17.5% YoY growth in advances.
  • Other income grew by 15.5% YoY in 3QFY14.
  • NIMs (net interest margins) came down significantly from 3.8% in 1HFY13 to 3.5% in 1HFY14.
  • Net NPAs (Non Performing Assets) increased from 2.59% in 3QFY13 to 3.24% in 3QFY14 marking continued asset quality pressures.
  • Net profit falls significantly by 34.2% YoY in 3QFY14 primarily on account of higher operating costs, and higher provisions during 3QFY14.
  • Capital adequacy ratio stood at 11.6% at the end of 9mFY14 as per Basel III norms. The bank raised capital via QIP in January 2014.

Rs (m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Interest income 303,654 348,705 14.8% 1,247,366 1,396,491 12.0%
Interest expense 191,892 222,299 15.8% 788,412 897,253 13.8%
Net Interest Income 111,762 126,405 13.1% 458,954 499,238 8.8%
Net interest margin (%)       3.8% 3.5%  
Other Income 36,267 41,903 15.5% 229,057 246,541 7.6%
Other Expense 70,122 92,124 31.4% 377,117 457,514 21.3%
Provisions and contingencies 26,679 41,496 55.5% 96,870 137,197 41.6%
Profit before tax 51,229 34,689 -32.3% 214,024 151,067 -29.4%
Tax 17,268 12,345 -28.5% 69,978 46,394 -33.7%
Profit after tax/ (loss) 33,961 22,343 -34.2% 144,046 104,674 -27.3%
Net profit margin (%) 11.2% 6.4%   11.5% 7.5%  
No. of shares (m)         684.0  
Book value per share (Rs)*         1592.3  
P/BV (x)         1.0  
* (Book value as on 31st December 2013)

What has driven performance in 3QY14?
  • Despite its large balance sheet size, SBI managed a good growth in loan book for the nine month period. While domestic advances grew 15% YoY and total advances reported 21% YoY growth. The deposit growth pace stood firm at 16.7% YoY. The loan growth was led by large corporate and retail loan segment, sequentially the growth stood flat. While these are the outcome of the existing sanctions, the incremental loan sanction trend remains subdued.

    Large, Mid-corporates and auto advances stay strong
    (Rs m) 3QFY13 % of total 3QFY14 % of total Change
    Advances 9,781,153   11,837,230   21.0%
    Agriculture 1,154,320 11.8% 1,234,470 10.4% 6.9%
    Retail 1,998,240 20.4% 2,308,270 19.5% 15.5%
    Home Loans 1,131,630 11.6% 1,351,290 11.4% 19.4%
    Auto Loans 228,460 2.3% 276,980 2.3% 21.2%
    SME 1,585,980 16.2% 1,600,100 13.5% 0.9%
    Mid Corp 1,750,250 17.9% 2,192,950 18.5% 25.3%
    Large Corporates 1,566,840 16.0% 1,996,580 16.9% 27.4%
    Deposits 11,566,910   13,499,400   16.7%
    CASA 4,910,000 42.4% 5,523,850 40.9% 12.5%
    Tem deposits 5,872,120 50.8% 7,062,370 52.3% 20.3%
    Credit deposit ratio 84.6%   87.7%    

  • The deposits grew 16.7% YoY during the quarter. The CASA ratio at 43.9% during 3QFY14 remains one of the highest in the industry. The CASA growth was led by improved traction in savings accounts during the third quarter FY14.

  • Healthy loan growth performance did translate into decent core income performance. The net interest income grew 13.1% YoY during 3QFY14. However, with the credit off-take remaining tepid and moderation in CASA share, the NIMs for the quarter fell 8 bps YoY and stood at 3.3% during 3QFY14. While this scenario is expected to persist, margin pressures stand imminent going forward.

  • Coming to other income growth that stood 15.5% YoY was largely led by good traction in fee income and forex gains. The management expects to focus on other income performance going forward maintaining the traction.

  • Besides asset quality pressures, the profitability for SBI was marred by increased operating costs during 3QFY14. As witnessed in previous quarters, the employee expenses stood higher primarily on account of provisions towards pension and wage-hike. Moreover, the the other administrative costs also stood up and increased 26% YoY. Consequently, the cost-income ratio for the bank stood at higher levels of 56% during 3QFY14. While this number for SBI stands as one of the highest in the industry, this deterioration in cost metrics now is a point of concern for the bank.

  • As the asset quality woes continue to hamper the earnings performance of SBI, the third quarter of FY14 witnessed further slippages and increased incremental restructurings. The gross non-performing assets (NPAs) for the third quarter FY14 rose to 5.7% levels from 5.3% same quarter a year ago. The net NPAs at 3.24% during 3QFY14 also stood higher as against 2.6% same quarter a year ago.

    With stressed assets on the increase, the provision coverage has dropped (from 61.5% in 3QFY13 to 58.3% in 3QFY14) which is reflective of early signs of a weakening balance sheet. The stressed assets i.e. bad loans plus restructured advances stood at higher levels of 8.12% during 3QFY14. The mid-corporate and SME segment continue to add to the asset quality woes of SBI. Prolonged economic slowdown has led to increased bad loans and thereafter the rise in restructured loans. Moreover, rising defaults would imply higher credit costs and hence the profitability of SBI is expected to remain under pressure going forward.

What to expect?
At the current price of Rs 1,475 the stock of SBI is trading at 1.0 time our estimated FY16 adjusted book value.

The slowdown in credit growth and persistent asset quality pressures coupled with operating inefficiencies would restrict earnings growth going forward. The higher credit costs and capital insufficiency would further add to the woes of SBI, in our opinion.

While earnings performance is reflective of the subdued GDP growth and other economic challenges, we believe that it will be some time before investors fetch any upside in the valuations of the bank. Given that the risk-reward ratio is skewed in favour of the former, we recommend investors to Hold on to the stock at current levels. We do believe that the current valuations of SBI factor in most of the downside risks on account of NPAs. A gentle reminder that please ensure that no stock forms more than 3-5% of your stock portfolio.

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