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SBI: Modest improvement in asset quality
Aug 8, 2014 | Updated on Aug 9, 2014

State Bank of India (SBI) declared its results for the first quarter of the financial year 2014-15 (1QFY15). The net interest income for the quarter grew by healthy 15.1% YoY and the profitability was up by modest 3.3% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income has grown by healthy 15.1% YoY in 1QFY15, on the back of 13% YoY growth in advances.
  • Other income however has declined by 5% YoY in 1QFY15.
  • NIMs (net interest margins) have come down from 3.2% in 1QFY14 to 3.1% in 1QFY15.
  • Net NPAs (Non Performing Assets) have reduced from 2.83% in 1QFY14 to 2.66% in 1QFY15 marking improvement in asset quality.
  • Net profit has grown by modest 3.3% YoY on the back of decent top-line performance and modest decrease in NPAs. Provisions, however, have stood on the higher side.
  • Capital adequacy ratio stood at 12.3% at the end of 1QFY15 as per Basel III norms.

Rs (m) 1QFY14 1QFY15 Change
Interest income 317,183 364,871 15.0%
Interest expense 202,065 232,349 15.0%
Net Interest Income 115,119 132,522 15.1%
Net interest margin (%) 3.2% 3.1%  
Other Income 44,743 42,521 -5.0%
Other Expense 84,349 87,166 3.3%
Provisions and contingencies 28,659 34,967 22.0%
Profit before tax 46,854 52,910 12.9%
Tax 14,443 19,419 34.5%
Profit after tax/ (loss) 32,411 33,491 3.3%
Net profit margin (%) 10.2% 9.2%  
No. of shares (m)   746.6  
Book value per share (Rs)*   1,503.0  
P/BV (x)   1.6  
* (Book value as on 30th June 2014)

What has driven performance in 1QFY15?
  • As the above financial snapshot depicts, the profitability of SBI during the quarter was largely impacted by the higher provisioning and lower non-interest income on account of poor treasury gains during the quarter. However, the contained operating expenses helped the bank to put up a modest 3.3% YoY growth in bottom-line.

  • Amid signs of economic revival under the helms of the reformist government, SBI expects uptick in loan demand as the stalled projects start moving. While the quarter gone by did witness moderate fall in the market share in advances and deposits of SBI, the bank expects to maintain industry averages going forward. Also, the modest loan book growth of around 13% YoY happens to be the conscious strategy of the bank to maintain credit quality in the light of weak macros. While the total loan book grew around 13% YoY, the corporate and retail loan portfolio drove the total credit. Home loan portfolio continues to remain robust.

    Modest growth in business
    (Rs m) 1QFY14 1QFY15 Change
    Advances 10,951,450 12,322,880 12.5%
    Deposits 12,573,890 14,189,150 12.8%

  • On the deposits front, the flight to retail term deposits in quest for higher rates led to subdued CASA growth on YoY basis. Despite the increased term deposits, the CASA ratio at 43.5% remains one of the highest in the industry. Notably, the bank has continued to shed bulk deposits, maintaining sufficient liquidity in the balance sheet.

  • Operating expenses have remained under control on the back of muted staff expenses and no major spike in overhead expenses. Therefore, the cost-income ratio for the bank has come down to 49.8% in 1QFY15 from 52.8% in 1QFY14.

  • Provisions however have burgeoned during the quarter on account of sharp spike (72% YoY) in loan loss provisions.

  • Asset quality performance has remained mixed during the quarter. While both gross and net NPAs have come down, the fresh slippages continue to remain on the higher side. The gross NPAs have come down to 4.9% in 1QFY15 from higher levels of 5.6% same quarter a year ago. Net NPAs too were down from 2.83% in 1QFY14 to 2.66% in 1QFY15 marking improvement in asset quality. The agri loan quality remains vulnerable on account of electoral promise to waive off loans in Andhra Pradesh.

  • The total restructured assets as at the end of June 2014 quarter has stood at Rs 586.4 bn. The total stressed assets i.e. gross NPAs plus restructured assets have stood at 8.3% during 1QFY15. However, as cited by the management the restructuring pipeline has been growing thinner and the corporate debt restructuring has slowed down.

  • Modest uptick in profitability has led to 145 bps increase in RoEs that stood at 11.9% in 1QFY15. The RoAs were up by 9 bps at 0.74% during the quarter.
What to expect?
At the current price of Rs 2,414, the stock is valued at 1.3 times our estimated FY17 adjusted book value.

PSU banks continue to reel under asset quality pressures. As the broader economy is yet to pick up with the momentum, the credit growth demand too remains weaker. Amongst the PSU banking space, we prefer SBI due to its enviable resource franchise, loyal customer base and pricing power. State Bank of India (SBI) definitely has an edge over its PSU banking peers. Moreover, it is well placed to exploit the potential that is likely to arise once the investment cycle picks up. And hence deserves a place in the long-term portfolio. Therefore, we reiterate our view that investors should consider buying the stock at Rs 2,000 or lower. Having said that, we continue to keep a close watch on the asset quality.

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