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State Bank of India: Worst still not behind
May 23, 2014 | Updated on May 26, 2014

State Bank of India (SBI) declared its results for the fourth quarter (4QFY14) and the financial year 2012-14. The net interest income for the quarter increases by 16.5% YoY and net profit falls by 7.8% YoY during 4QFY14. For the full year FY14, the net profits decrease by 22.8% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) increases by 16.5% YoY in 4QFY14 on the back of healthy 15.4% YoY growth in advances. For full year, the NII grows by 11.2% YoY.
  • Other income grows by modest 18.7% YoY in 4QFY14.
  • NIMs (net interest margins) are down significantly from 3.7% in 4QFY13 to 3.5% in 4QFY14.
  • While sequentially cost-income ratio improves, on annual basis the ratio goes up to 53% in FY14 from 49% a year ago.
  • Net NPAs (Non Performing Assets) increases from 2.1% in FY13 to 2.6% in FY14. The gross NPAs have spikes from 4.8% in FY13 to 4.9% in FY14; albeit marginally. That said, on sequential basis the asset quality demonstrates marked improvement.
  • Net profit continues to fall and was down by 22.8% YoY on account of higher provisions and operating expenses during FY14.
  • Capital adequacy ratio stands at 12.5% at the end of FY14 as per Basel II norms.

Rs (m) 4QFY13 4QFY14 Change FY13 FY14 Change
Interest income 307,842 358,576 16.5% 1,196,551 1,363,508 14.0%
Interest expense 197,058 229,548 16.5% 753,258 870,686 15.6%
Net Interest Income 110,784 129,028 16.5% 443,293 492,822 11.2%
Net interest margin (%) 3.7% 3.5%        
Other Income 55,467 65,857 18.7% 160,368 185,529 15.7%
Other Expense 88,645 88,606 0.0% 292,844 357,259 22.0%
Provisions and contingencies 41,810 58,911 40.9% 111,308 159,354 43.2%
Profit before tax 35,797 47,367 32.3% 199,509 161,739 -18.9%
Tax 2,804 16,960 504.8% 58,459 52,827 -9.6%
Profit after tax/ (loss) 32,992 30,407 -7.8% 141,050 108,912 -22.8%
Net profit margin (%) 10.7% 8.5%   11.8% 8.0%  
No. of shares (m)         746.6  
Book value per share (Rs)*         1,503  
P/BV (x)         1.8  
* (Book value as on 31st March 2014)

What has driven performance in FY14?
  • As expected, the country's largest lender has reported fall in profits for FY14. For the quarter 4QFY14, the profits were down by 7.8% YoY, while for the full year the profits have shrunk by 22.8% YoY. The full year profits stood quiet close to our estimates, exceeding the same by mere 1.5%. That said, the strong top-line performance of SBI is reflective of good business visibility going forward for the bank. Not just those, the reduction in slippages and improvement in cost efficiencies were the major highlights of FY14 earnings performance of SBI. But with the credit quality pressures still looming and NPAs and restructured assets being on the higher side, we believe worst is still not behind for the bank.

  • Maintaining a decent balance sheet growth of 14%, the bank has reported a strong 15.4% YoY growth in loan book and 15.9% YoY growth in deposits during FY14. While the bank is consolidating its loan portfolio mix, the loan growth has remained in good stead. Notably, barring SME book, all other segments have reported decent performance.

    Large corporate, overseas and agri book outnumber, SME seen down
    (Rs m) FY13 % of total FY14 % of total Change
    Advances 10,785,570   12,451,220   15.4%
    Agriculture 1,248,340 11.6% 1,547,150 12.4% 23.9%
    International 1,690,650 15.7% 2,143,020 17.2% 26.8%
    Retail 2,096,940 19.4% 2,376,670 19.1% 13.3%
    Home Loans 1,195,256 11.1% 1,402,235 11.3% 17.3%
    Auto Loans 251,633 2.3% 285,200 2.3% 13.3%
    SME 1,841,280 17.1% 1,797,730 14.4% -2.4%
    Mid Corp 2,048,530 19.0% 2,283,840 18.3% 11.5%
    Large Corporates 1,758,310 16.3% 2,427,190 19.5% 38.0%
    Deposits 12,027,400   13,944,090   15.9%
    CASA 5,254,880 43.7% 5,801,970 41.6% 10.4%
    Tem deposits 6,046,490 50.3% 7,257,870 52.0% 20.0%
    Credit deposit ratio 89.7%   89.3%    

  • While the overall deposits have reported healthy growth, the CASA growth was restricted to 10.4% YoY. The term deposits have outnumbered and grew by 20% YoY during FY14. The CASA ratio remains healthy at 41.6% levels in FY14; albeit few notched won from 43.7% a year ago.

  • Healthy loan growth has translated into healthy top-line. The NII has grown by 16.5% YoY during 4QFY14 and 11.2% YoY during FY14. Moderation in CASA levels and lower yields, however, have compressed margins for the bank during FY14. Margins were seen down to 3.5% in FY14 from higher levels of 3.7% a year ago.

  • The other income growth was encouraging at 18.7% YoY during 4QFY14 and 15.7% YoY growth during FY14. Gains from domestic investment book and higher recoveries coming from written-off accounts drove the higher other income growth during FY14.

  • Improving operating efficiencies remains on the radar of SBI. Even FY14 has reported higher operating expenses that spiked up 22% YoY. The cost-income ratio, as a result, has gone up to 53% levels from 49% a year ago. Wage-related provisions and higher overheads have the cost-income ratio for the bank during the year. That said, for 4QFY14, the expenses remained flat YoY basis and the provisions too stood on the lower side.

  • The main highlight of the March quarter result (4QFY14) was the sequential fall in bad loans and the reduction in slippages. The gross NPAs were seen down to 4.95% in 4QFY14 from 5.73% in 3QFY14. The net NPAs too have come down from higher levels of 3.24% in 3QFY14 to 2.57% in 4QFY14. However, on annual basis, the NPAs still have stood on the higher side. The slippages have moved down to Rs 79.5 bn in the March quarter as against Rs 114 bn in the previous quarter. Sale of bad loans to ARCs has helped the bank to report lower numbers. While the upgradations and recoveries have improved, the write-offs too have stood higher. As a result, the outstanding bad loans have shown an improved number. Agri followed by mid-corporate and SME have reported maximum stress and higher NPAs during the year.

    The restructured assets continue to burgeon and have expanded to Rs 589.4 bn as at the end of March 2014. On a positive side, the stressed assets or the gross NPAs + restructured advances have decreased to 8.4% in 4QFY14 from 9.0% a quarter ago. However, on annual basis it still stands higher. Prolonged economic slowdown has led to increased bad loans and thereafter the rise in restructured loans. Hence we continue to hold conservative estimates with respect to gross NPAs. That said, given the efforts to consolidate books and robust risk management systems in place, we expect the slippages to remain under control.

  • The capital adequacy ratio has stood at 12.5% at the end of FY14 as per Basel II norms. The tier I was reported at 9.7% levels. The bank stands sufficiently capitalized to implement its growth strategy for the current fiscal.
What to expect?
At the current price of Rs 2,755, the stock is valued at 1.4 times our estimated FY16 adjusted book value.

Asset quality and cost pressures have marred the earnings performance of SBI for many quarters now. That said, the bank has already undertaken significant initiatives to improve costs and improve productivity. Technological upgradations have been catching up pace. Furthermore, consolidations of the loan portfolio and focus on less-risky assets have been on the radar for quite some time now. Thus, with the new person at the helms, SBI has been witnessing significant structural changes so that the balance sheet stays in good shape.

While tepid earnings performance is reflective of the subdued GDP growth and other economic challenges, it will be some time atleast to get the performance stabilize. The stock has already witnessed sizeable amount of momentum owing to the change in government. However, we are more concerned over the structural changes and the fundamental strength of the bank in terms of credit quality and cost efficiencies. Hence, we recommend investors to buy the stock only after maintaining sufficient margin of safety.

A gentle reminder that please ensure that no stock forms more than 3-5% of your stock portfolio.

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