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SBI: Mid corporate loans weigh on quality
May 27, 2015

State Bank of India (SBI) declared its results for the fourth quarter and financial year 2014-15 (FY15). The net interest income for the fiscal grew by 11.6% YoY while the net profits grew by 20% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 11.6% YoY in FY15 on the back of a 7.5% YoY growth in gross advances.
  • Other income grew sharply by 21.7% YoY.
  • NIMs (net interest margins) remain stable YoY at 3.2% in FY15.
  • Net NPAs (Non Performing Assets) fell from 2.6% in FY14 to 2.1% in FY15 thus providing some relief.
  • Net profits grew by 20% YoY on the back of controlled operating costs despite higher provisions.
  • Capital adequacy ratio stood at 12.0% at the end of FY15 as per Basel III norms.

Standalone financials
Rs (m) 4QFY14 4QFY15 Change FY14 FY15 Change
Interest income 358,580 401,010 11.8% 1,363,510 1,523,970 11.8%
Interest expense 229,550 253,890 10.6% 870,690 973,820 11.8%
Net Interest Income 129,030 147,120 14.0% 492,820 550,150 11.6%
Net interest margin (%)       3.2% 3.2%  
Other Income 65,856 85,152 29.3% 185,529 225,758 21.7%
Other Expense 88,606 108,176 22.1% 357,258 386,776 8.3%
Provisions and contingencies 58,910 65,933 11.9% 159,350 195,999 23.0%
Profit before tax 47,370 58,163 22.8% 161,741 193,133 19.4%
Tax 16,960 20,740 22.3% 52,830 62,120 17.6%
Profit after tax/ (loss) 30,410 37,423 23.1% 108,911 131,013 20.3%
Net profit margin (%) 8.5% 9.3%   8.0% 8.6%  
No. of shares (m)         7470.0  
Book value per share (Rs)*         216.0  
P/BV (x)         1.3  
* (Book value as on 31st March 2015)

What has driven performance in FY15?
  • Staid improvement in economic parameters and slow uptick in credit growth reflected well in the balance sheet expansion of the country's largest bank in FY15.

  • Coming to the specifics, the net interest income for the bank grew by 11.6% YoY for FY15 on the back of 7.5% YoY growth in advances. The loan growth was a disappointment as it came lower than the industry growth rate of about 10% in the same period. The margins for the bank remained stable at around 3.2% in FY15, despite the CASA proportion falling marginally. 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 bank's market share fell marginally from 16.6% to 15.9% on a YoY basis. The loan book expansion came largely from retail (14.6% YoY growth).

    Large corporate, retail advances stay strong
    (Rs m) FY14 % of total FY15 % of total Change
    Advances 12,098,290   13,000,260   7.5%
    Agriculture 887,230 7.3% 956,510 7.4% 7.8%
    Retail 2,376,670 19.6% 2,724,290 21.0% 14.6%
    Home Loans 1,407,380 11.6% 1,592,370 12.2% 13.1%
    Auto Loans 279,250 2.3% 321,490 2.5% 15.1%
    Corporates 8,834,390 73.0% 9,319,460 71.7% 5.5%
    Deposits 13,944,090   15,767,930   13.1%
    CASA 6,177,232 44.3% 6,748,674 42.8% 9.3%
    Tem deposits 7,766,858 55.7% 9,019,256 57.2% 16.1%
    Credit deposit ratio 86.8%   82.4%    

  • The deposits for the bank grew at 13.0% YoY and the term deposits grew at higher rate of 16.1% YoY during FY15. 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 FY15 fell down to 42.8% from 44.3% a year ago.

  • Highlight of the fiscal was the strong show put up by the other income component which managed to grow by a strong 21.7% YoY. The fee income growth came in at 11% YoY.

  • The operating efficiency of SBI got a good boost during the quarter. The cost to income ratio for the bank fell from 53% in FY14, to a more comfortable 50%. The total headcount of the bank was lower at 2,13,238 at the end of FY15 from 2,22, 809 in FY14.

  • FY15 witnessed an improvement in asset quality of the bank vis a vis last year. The gross NPAs fell from 4.9% in FY14 to 4.3% in FY15. The net NPAs too fell to 2.6% in FY14 from 2.1% in FY15. The worrying factor is that the SME and mid corporate loans which together continue to account for a quarter of SBI's loan book had gross NPA ratios of 8% and 11% respectively in FY15.

  • The provisioning costs also mellowed down a bit, but still going up by 23% YoY during FY15. The provision coverage ratio was at 69% as against 63.5% in FY14.
What to expect?
At the current price of Rs 279 the stock of SBI is trading at around 1.5 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 lower levels.

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