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SBI: Profits rise on low base effect
Aug 10, 2012

State Bank of India (SBI) declared its results for the first quarter of the financial year 2012-13 (1QFY13). The bank has reported 19.5% YoY growth in interest income and 137% YoY rise in net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 15% YoY in 1QFY13, on the back of a 20% YoY growth in advances.
  • Other income falls by 1% YoY in 1QFY13 on the back of lower fee and dividend income.
  • NIMs (net interest margins) remain steady at 3.6% in 1QFY13.
  • Net NPAs (Non Performing Assets) rose from 1.6% in 1QFY12 to 2.2% in 1QFY13.
  • Net profit rise by 137% YoY in 1QFY12 on account of a low base effect as well as lower provisions on advances.
  • Capital adequacy ratio stood at 13.2% at the end of 1QFY13 as per Basel II.

Rs (m) 1QFY12 1QFY13 Change
Interest income 241,974 289,167 19.5%
Interest expense 144,979 177,979 22.8%
Net Interest Income 96,995 111,188 14.6%
Net interest margin (%) 3.6% 3.6%  
Other Income 35,342 34,988 -1.0%
Other Expense 59,913 64,410 7.5%
Provisions and contingencies 41,569 24,563 -40.9%
Profit before tax 30,855 57,203 85.4%
Tax 15,020 19,688 31.1%
Profit after tax/ (loss) 15,835 37,516 136.9%
Net profit margin (%) 6.5% 13.0%  
No. of shares (m)   671.0  
Book value per share (Rs)*   1215  
P/BV (x)   1.6  
* (Book value as on 30th June 2012)

What has driven performance in 1QFY13?
  • Despite having low cost deposits (CASA-current account and savings account) of the size of the balance sheets of smaller banks in India, SBI saw slower growth on account of the high prevailing interest rates in the country. Customers preferred to park their funds in higher yielding deposits (fixed deposits), versus in lower yielding (savings accounts). SBI managed to grow its CASA base by only 10% YoY in 1QFY13. A large chunk of the bank's 16% YoY deposit growth over the past year came in from term deposits. The country's largest bank continued to reap the advantage of having the largest franchise. While the CASA to total deposits ratio has slipped from 45% in 1QFY12 to 43% currently, the bank is not worried as it still sees a 43-44% CASA base as very healthy. And this is in any case far superior to the levels seen for other public sector banks.

  • With regards to net interest margins (NIM), these remained steady at 3.6% at the end of 1QFY13. The bank saw an increase in yield on advances, over the past year on the back of rampant rate hikes by the central bank. Cost of funds also jumped for the same reason, however SBI was able to capitalize on its large CASA base. Going forward, the bank expects NIMs to remain in the 3.5-3.75% range, and definitely stay at above 3.5%. Advance growth was seen across segments and especially in the agri, large corporate and international segments. Overall, the bank managed to grow higher than the sector average for the year. SBI maintained its leadership position in the home loan space, and continues to see strong growth in auto loans on account of its attractive EMI schemes.

    Cost break-up
    (Rs m) 1QFY12 % of total 1QFY13 % of total Change
    Advances 7,881,530   9,458,190   20.0%
    Agriculture 954,520 12.1% 1,201,300 12.7% 25.9%
    International 1,107,120 14.0% 1,643,080 17.4% 48.4%
    Retail 1,651,310 21.0% 1,863,220 19.7% 12.8%
    Home Loans 932,250 11.8% 1,053,830 11.1% 13.0%
    Auto Loans 155,390 2.0% 190,400 2.0% 22.5%
    SME 1,232,490 15.6% 1,343,190 14.2% 9.0%
    Mid corporate 1,577,560 20.0% 1,677,560 17.7% 6.3%
    Large Corporates 1,141,220 14.5% 1,415,330 15.0% 24.0%
    Deposits 9,500,720   11,029,260   16.1%
    CASA 4,303,580 45.3% 4,738,950 43.0% 10.1%
    Tem deposits 4,695,270 49.4% 5,532,050 50.2% 17.8%
    Credit deposit ratio 83.0%   85.8%    

  • The bank's fee income showed a decline of 1% YoY, bringing the fee to total income ratio to 18% in 1QFY13 (20% in 1QFY12). Due to lower fee income, and lower dividend receipts (in line with the bank's strategy not to push for higher dividends from its subsidiaries only to recapitalize them later) other income saw a 1% decline YoY in 1QFY13.

  • The bank's capital adequacy increased to 13.2%, with its Tier-1 ratio at 9.38% at the end of June 2012, compared to 11.6% last year. Last quarter the bank received an infusion of capital from the Center. Plus it has been adopting a number of capital conservation strategies in order to improve this ratio.

  • The bank saw an improvement this time on the provisioning account. In 1QFY13, provisions were down 41% due to a fall in investment depreciation and standard asset provisions (now the provisions are only on the incremental loan portfolio).

  • SBI did feel the heat on its NPAs in the past 12 months with gross NPAs rising to almost 5% of advances in 1QFY13 from 3.5% in 1QFY12. Net NPAs increased to 2.2% (1.6% in 1QFY12). The bank has reached a provision coverage ratio of 64.3% in June 2012, compared to 67.3% at the end of 1QFY12. The bank higher slippages OF Rs 108 bn in 1QFY13 which was quite disappointing. The bank saw increased slippages in the agri, mid-corporate and SME book, and is hence going slower on lending to these segments as they are seeing more effects of stress. The bank also saw some stress in the retail book. Iron and steel, textiles, infra, engineering and aviation are the top 5 sectors with maximum NPA accounts.

  • Slippages under the RBI's restructured assets scheme stood at 20% at the end of June 2012. Slippages to restructured book at the end of 1QFY13 amounted to Rs 73 bn. There were no fresh slippages from the restructured book in 1QFY13. The bank has an 8.6% exposure to the infra sector, out of which only 4.5% is to the power sector and it does not have much exposure to SEBs. However, with the current macro environment, and high rates still prevailing in the market, further stresses cannot be ruled out on the overall book. It does not expect a sudden spike in restructuring going forward as it has been prudent in classification and provisioning so far. The bank believes that it will take 1-2 quarters more for things to stabilize.

What to expect?
At the current price of Rs 1,894, the stock is valued at 1.2 times our estimated FY15 adjusted book value. The bank has seen a robust performance on the core business front, with a healthy growth in NII and sustained margins. The bank has been able to sustain its NIMs even in light of a rising interest rate environment on account of its large CASA base and huge franchise and plans for this to increase to 3.75% for the year. However, the discounts it is offering on the retail book (home and car loans) may put some pressure on the same. Profit growth for the year has still come in well above estimates on account of lower NPA provisioning and sustained operating profit growth. On the plus side, the bank does not have any unamortized pension on its books or much exposure to discoms which most of its peer banks still hold.

There may however be some further pains going forward on the NPA front, with incremental slippages seeing an increase. Capital concerns have been allayed temporarily; however the bank will still need some more capital in FY13-14 to sustain growth. However it has been opting for capital conservation techniques through internal measures. At the current valuations we have a cautious view on the stock, since it already met our target price during the March 2012 StockSelect performance review. Since meeting the target price, the stock has fallen because of asset quality concerns, which will take 1-2 more quarters to stabilize. Thus even though the stock may look attractive at this point from valuation perspective, we continue to advice investors to remain cautious on the stock.

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