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SBI: NPAs, NIMs make a disappointing quarter - Views on News from Equitymaster
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SBI: NPAs, NIMs make a disappointing quarter
May 23, 2013

State Bank of India (SBI) declared its results for the fourth quarter of the financial year 2012-13 (4QFY13). The net interest income for the quarter declined by 4.4% YoY and the net profit dropped by almost 19% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income declines by 4.4% YoY in 4QFY13, due to lower interest income and higher costs.
  • Other income grows by modest 3% YoY in 4QFY13.
  • NIMs (net interest margins) come down significantly from 3.9% in FY12 to 3.3% in FY13.
  • Net NPAs (Non Performing Assets) increase from 1.8% in FY12 to 2.1% in FY13 marking asset quality pressures.
  • Net profit falls significantly by 19% YoY in 4QFY13 on account of weak net interest income, higher provisions and higher operating expenses during 4QFY13.
  • Capital adequacy ratio stood at 12.92% at the end of 4QFY13 as per Basel II.

Rs (m) 4QFY12 4QFY13 Change FY12 FY13 Change
Interest income 285,828 307,842 7.7% 1,065,215 1,196,571 12.3%
Interest expense 169,918 197,058 16.0% 632,304 753,258 19.1%
Net Interest Income 115,910 110,784 -4.4% 432,911 443,313 2.4%
Net interest margin (%)       3.9% 3.3%  
Other Income 53,768 55,467 3.2% 143,515 160,348 11.7%
Other Expense 73,710 88,645 20.3% 260,690 292,844 12.3%
Provisions and contingencies 31,404 41,810 33.1% 130,902 111,308 -15.0%
Profit before tax 64,564 35,797 -44.6% 184,833 199,509 7.9%
Tax 24,061 2,804 -88.3% 67,760 58,459 -13.7%
Profit after tax/ (loss) 40,503 32,992 -18.5% 117,073 141,050 20.5%
Net profit margin (%) 14.2% 10.7%   11.0% 11.8%  
No. of shares (m)         684.0  
Book value per share (Rs)*         1445.7  
P/BV (x)         1.5  
* (Book value as on 31st March 2013)

What has driven performance in FY13?
  • The country's largest lender posted 19% decline in profits for the 4QFY13 on account of weak revenue growth, higher provisions against bad assets and higher operating costs. The profits dropped despite substantial fall in tax expense (88.3% YoY fall) for the quarter. The full year FY13 profits stood in good stead recording 20.5% YoY growth backed by lower provisions and lower tax expenses.

  • However, net interest income (NII) and operating profits came as a huge disappointment for SBI during the last quarter of FY13. NII declined by 4.4% YoY and the operating profits fell significantly by 19% YoY for 4QFY13. This fall can be attributed to the depressed margins, poor non-interest income and higher operating costs.

  • Net interest margins (NIMs) for the full year FY13 stood at 3.3%, down from 3.9% a year ago that marks a decline of 13.2% YoY. FY13 witnessed decelerating trend with respect to NIMs on account of costs pressures and lower yields in the light of tough environment. Cost of funds that grew 5% YoY and accounting for pension funds through deposits dragged the margins for the full year. Yields too dropped by similar percentage on account of strategic shift from high yielding risky assets to lower yielding less risky assets. From 4.0%+ NIMs in FY12, they are down to 3.6% in FY13 and there remains limited scope for the bank to improve margins significantly from here on.

  • The loan growth for SBI stood higher than the industry average recording 21% growth YoY for FY13. While SBI's loan exposure stands pretty diversified, FY13 loan growth was largely driven by large corporate advances and auto loans. Large corporate loans grew by sturdy 40.3% YoY, followed by mid-corporates that grew 18.2% YoY and retail loans with 15% YoY growth. The corporate loans for FY13 were largely characterized by refinancing facilities encompassing quality corporates. Growth in retail loans in turn was driven by robust 35.5% growth YoY in auto loans, followed by home loans with 16.3% YoY growth and educational loans with 9.4% YoY growth. With decreasing turnaround time, auto loans (formed 12% of the retail loans) stole the show for FY13 as the bank continues to maintain its leadership position in this segment. Home loans formed as high as 57% of the total retail pie and would continue to be the focus segment for FY14 as well; however, educational loans (6% of total retail) registered benign growth for FY13. Likewise, direct agri business, international advances and SME advances too grew at healthy pace.

  • On similar lines, deposits too grew fairly strong recording 15.2% growth YoY; retail deposits being the driving force with high cost bulk deposits being all time low for the bank in its last quarter of FY13. But the growth in term deposits marginally surpassed the growth in CASA deposits. That said the CASA ratio was maintained at elevated levels of 44% for FY13 with SBI fully banking on its qualitative and mammoth liability franchise. While the current account component is growing gradually due to subdued business conditions, savings account traction on the other hand stood healthy recording 15.3% YoY growth. 287 lakh new savings accounts were opened during FY13.

    Retail, mid-corporates and SME advances stay strong
    Rs (m) FY12 % of total FY13 % of total Change
    Advances 8,936,130   10,785,570   20.7%
    Agriculture 1,072,560 12.0% 1,248,340 11.6% 16.4%
    International 1,357,240 15.2% 1,690,650 15.7% 24.6%
    Retail 1,824,270 20.4% 2,096,940 19.4% 14.9%
    Home Loans 1,027,390 11.5% 1,194,670 11.1% 16.3%
    Auto Loans 183,060 2.0% 248,000 2.3% 35.5%
    SME 1,637,450 18.3% 1,841,280 17.1% 12.4%
    Mid Corp 1,733,810 19.4% 2,048,530 19.0% 18.2%
    Large Corporates 1,253,400 14.0% 1,758,310 16.3% 40.3%
    Deposits 10,436,470   12,027,400   15.2%
    CASA 4,581,200 43.9% 5,254,880 43.7% 14.7%
    Tem deposits 5,240,940 50.2% 6,046,490 50.3% 15.4%
    Credit deposit ratio 85.6%   89.7%    

  • The non-interest performance for the quarter disappointed registering negligible 3% growth YoY on account of weak core fee income. The fee income fell 8.1% YoY and fees as percentage of total non-interest income dropped substantially to 72% in FY13 from 84% in FY12.

  • FY13 observed operating metrics going on a toss for SBI. The total operating costs burgeoned 20.3% YoY on account of higher salary expenses that soared 27.4% YoY and heightened overheads that increased 24.0% YoY for 4QFY13. Despite fall in provision for pension liabilities, the employee costs stood higher. That said, the unamortized pension provisions stood NIL during 4Q providing respite.

  • While the asset quality for SBI did throw few positive surprises, the negatives rather overpowered. The performance of bad loans improved on sequential basis with Gross NPAs and Net NPAs coming down to 4.8% and 2.1% in 4QFY13 from 5.3% and 2.6% respectively accompanied with sequential improvement in provision coverage to 66.6%. Additionally, the recoveries and upgradations stood higher and slippages improved sequentially providing silver lining to the long-standing chronic asset quality issues of the bank. This can be attributed to the fact that the corporate book held up well for SBI during FY13 and the bad loans diminished from the December quarter of FY13. The retail book also remained in good stead with NPAs in auto and home loan segment hovering around mere 1.0% levels. However, on the basis of annual comparison, the bad loans and the gross slippages for the bank actually soared up. While the bank's position is the numero uno lender for major part of the industry, the underlying economic pressures do have a direct bearing on the SBi's balance sheet. Likewise, the lender witnessed severe pain in terms of increased bad loans and slippages emerging from mid-corporates, SME and agri segment (in that order). The highest percentage share of NPAs were witnessed in the already troubled industries such as textiles (contributing 15.8% to the total NPAs), paper (22.9%), technology(20.3%), transport (13.0%) and hotels (12.4%).

  • The biggest dampener to the asset quality of SBI was the lumpy restructured book that continues to balloon each year. The total restructured stock stands at Rs 541 bn and the restructured book stood at Rs 431 bn as at the end of 31st March 2013. The restructuring exacerbated from the distressed sectors of the economy such as iron and steel (with Rs 68.3 bn of restructuring), power (55.8 bn), textiles (Rs 43.0 bn), infrastructure ( Rs 21.6 bn) and aviation (Rs 20.1 bn). Furthermore, the restructured pipeline remains pretty hefty with 21 accounts to be restructured in the coming quarters. The Tamil Nadu SEB is likely to come up for restructuring in 1QFY14. The major ones that have contributed to the restructured assets as on FY13; namely were Suzlon Energy, Sason Power and Jindal stainless. Not to miss out, 25% of the total restructured book fell into NPA category by the end of FY13 and thus there is no denying the fact that asset quality for SBI is worrisome.

  • While quarterly provisions spiked meaningfully (33.1% YoY increase) proving a major deterrent to the profitability of the bank in 4QFY13, the provisions for the full year stood lower. The provision coverage for the bank reduced for FY13 to 66.6% from 68.1% a year ago.

    Breakup of provisions
    Rs (m) FY12 FY13 Change
    Loan Loss 115,460 113,680 -1.5%
    Investment depreciation 6,640 -9,610 -244.7%
    Standard assets 9,790 7,500 -23.4%
    Others -980 -250 -74.5%
    Total 130,910 111,320 -15.0%

  • The bank's capital adequacy came down to 12.9%, with its Tier-1 ratio at 9.5% at the end of March 2013, compared to 13.9% a year ago. In order for the bank to achieve asset growth, capital infusion is necessary. The management would decide upon further capital arise only during the second quarter of FY14.

    What to expect?

    At the current price of Rs 2164, the stock of SBI is trading at 1.3 times our estimated FY15 adjusted book value. SBI earnings mirror the underlying macroeconomic conditions. While SBI remains the preferred choice for most of the borrowers, the country's largest bank has always been under asset quality pressures.

    While the bad loans and slippages may have improved during 4QFY13, we are not particularly enthused about the same as higher restructured assets continue to remain a overhang on the earnings growth of the bank and is indicative of postponement of problem.

    FY13 also witnessed operating inefficiencies as a result of higher operating costs for SBI. The operating profits dipped and non-interest and fee based income remained tepid for major part of the year. Operating metrics, margins and loan restructuring form part of our watch-list. With continued asset quality pressures and shrinkage in return ratios, we reiterate our 'HOLD' view on the stock and advise our investors to wait and watch until the above concerns are allayed.

    We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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