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SBI: Biggest jump in NPAs since 2004
Aug 12, 2013

State Bank of India (SBI) declared its results for the first quarter of the financial year 2013-14 (1QFY14). The net interest income for the quarter grew by modest 3.5% YoY and the net profit shrunk by almost 13.6% YoY in 1QFY14. Here is our analysis of the results.

Performance summary
  • Net interest income grows by mere 3.5% YoY in 1QFY14, due to lower interest income and higher costs.
  • Other income grows by healthy 28.1% YoY in 1QFY14.
  • NIMs (net interest margins) came down significantly from 3.9% in FY12 to 3.3% in FY13.
  • Net NPAs (Non Performing Assets) increased from 2.2% in 1QFY13 to 2.8% in 1QFY14 marking continued asset quality pressures.
  • Net profit falls significantly by 13.6% YoY in 1QFY14 on account of weak net interest income, higher provisions and higher operating expenses during 1QFY14.
  • Capital adequacy ratio stood at 11.85% at the end of 1QFY14 as per Basel III norms.

Rs (m) 1QFY13 1QFY14 Change
Interest income 289,224 317,183 9.7%
Interest expense 177,979 202,065 13.5%
Net Interest Income 111,246 115,119 3.5%
Net interest margin (%) 3.6% 3.1%  
Other Income 34,931 44,743 28.1%
Other Expense 64,410 84,349 31.0%
Provisions and contingencies 24,563 28,659 16.7%
Profit before tax 57,203 46,854 -18.1%
Tax 19,688 14,443 -26.6%
Profit after tax/ (loss) 37,516 32,411 -13.6%
Net profit margin (%) 13.0% 10.2%  
No. of shares (m)   684.0  
Book value per share (Rs)*   1524.0  
P/BV (x)   1.0  
* (Book value as on 30th June 2013)

What has driven performance in 1QFY14?
  • June 2013 quarter proved to be very painful for SBI with one of the highest jump in Net NPAs since 2004. In addition to the surge in fresh slippages, the fall in margins and the depletion of return ratios together dampened the earnings performance for SBI. Moreover, higher operating costs and provisions on bad loans have dented the bottom-line. Not just that, the negative mark to market losses (MTM) on the international book and the increased pension liabilities further exacerbated the pain for the bank. The profits for the quarter have declined by 13.6% YoY. The only saving grace was the other income performance that entirely emerged from the treasury portfolio. SBI's dismal performance is reflective of the bleak macro-economic scenario.

  • Coming to the top-line, the net interest income has grown by modest 3.5% YoY and is definitely not an encouraging number. The higher interest costs and lower yields have impacted the interest income for the bank. The bank has shifted focus to lower-yielding assets such as home loans on account of risks emanating from certain large corporate exposures. Hence, the interest income growth has been muted. The margins (NIMs) too have compressed and are down from higher levels of 4.17% some 4 quarters back to current 3.4% levels. The shrinkage in low-cost deposit base also led to margins pressures during the quarter. Moreover, the base rate of SBI at 9.7% stands lowest in the industry. Hence, margin pressures stand imminent going ahead as well. That said, the bank expects to report margins in the range of 3.5%-3.6% for the full year FY14.

  • The overall loan growth for SBI was recorded at decent 15.8% levels during the quarter. The continued satisfactory performance of the loan book can be attributed to the fact that the bank stands more than sufficiently liquid. Hence, the strong loan book expansion is expected to continue even in forthcoming quarters. However, in the event of dramatic jump in bad loans, the sectoral loan composition stands critical. The June quarter loan growth for the bank was primarily driven by the 21% YoY growth in mid-corporates, 19% YoY growth in large corporates and 16% YoY growth in retail segment. Notably, the 39% YoY growth in auto loan portfolio and robust 18% YoY growth in home loans drove the retail loan book expansion for the bank.

  • The first quarter was characterized by retail growth on the assets side of the balance sheet for SBI. The loan-mix for SBI remains more or less same as in the previous year and the retail contribution continues to be high (19.8%), followed by mid-corporate (18.9%) and large corporate (15.4%). While SME portfolio contributes almost 16.0% to the overall portfolio, the loan growth from this segment stood at weak levels of 9.2% YoY. International book that grew 13.3% YoY is the growth engine for SBI and continues to contribute significantly. While the bank boasts of its diversified exposure, the risks emerging from shaky corporates, agri and troubled SMEs continue to bother the asset quality of SBI.

    Large, Mid-corporates and auto advances stay strong
    (Rs m) 1QFY13 % of total 1QFY14 % of total Change
    Advances 9,458,190   10,951,450   15.8%
    Agriculture 1,122,600 11.9% 1,261,000 11.5% 12.3%
    International 1,643,080 17.4% 1,861,580 17.0% 13.3%
    Retail 1,863,220 19.7% 2,165,830 19.8% 16.2%
    Home Loans 1,053,830 11.1% 1,247,720 11.4% 18.4%
    Auto Loans 190,400 2.0% 264,110 2.4% 38.7%
    SME 1,606,420 17.0% 1,754,070 16.0% 9.2%
    Mid Corp 1,707,970 18.1% 2,070,260 18.9% 21.2%
    Large Corporates 1,417,470 15.0% 1,691,420 15.4% 19.3%
    Deposits 11,029,260   12,573,890   14.0%
    CASA 4,738,950 43.0% 5,275,940 42.0% 11.3%
    Tem deposits 5,532,040 50.2% 6,536,290 52.0% 18.2%
    Credit deposit ratio 85.8%   87.1%    

  • Deposits for the quarter have grown 14.0% YoY, but the growth in term deposits outpaced the growth in CASA for the first quarter. While the low-cost deposit base has grown 11.3% YoY, the term deposits grew by healthy 18.2% YoY. Moreover, the CASA ratios have dropped from higher levels of 47% a year back to current 44% for the domestic business. That said the CASA ratio at levels of 44% stand higher with respect to industry comparion and SBI continues to bank upon its qualitative and mammoth liability franchise. The savings deposits grew by 12.3% YoY, while the traction in current accounts continues to remain weak. That said, the Management is pretty confident with regards to retail deposits

  • The healthy non-interest performance of SBI during the first quarter proved a savior for the bank. The robust 28.1% YoY growth was largely driven by gains on bond portfolio primarily coming from domestic bonds. Also, the bank has transferred larger proportion of HTM portfolio to AFS during 1QFY14. Had it not been for other income growth, the profits for SBI would have shrunk further.

  • The operating efficiency of SBI has deteriorated during the quarter. The operating expenses burgeoned as high as 31.0% during the first quarter. Higher operating expenses was largely on account of higher employee costs due to pension provisions and expansion in bank's physical network. Consequently, the cost-income ratio worsened and was reported at 52.8% during 1QFY14; which stands one of the highest in the industry. The bank will have to bear the likely impact of the increased wage provisions on account of increased mortality rates for the next couple of quarters. Hence, the operating costs are expected to stay at elevated levels.

  • 1QFY14 proved to be one of the worst quarter for SBI in terms of asset quality in recent times. The Gross NPAs at above 5.5% levels and Net NPAs closed to 3% levels is an alarming signal. Moreover, the bank reported higher slippages to the tune of Rs 137.66 bn during 1QFY14 which is equal to the slippages of the last two quarters put together. The upgrades and recoveries of accounts stand weak and the bank managed to upgrade mere Rs 15.19 bn during the June quarter. The bank's fastest growing portfolios have apparently witnessed highest NPAs. For instance, the mid-corporate segment has reported highest NPA ratio of 9.5% and the bank's large corporate portfolio has reported NPA ratio of 1.7%. Not just that, the higher NPAs have come from agri portfolio that reported NPA ratio at 11.6%, followed by SME portfolio that equally worsened reporting 8.5% of NPAs. While the asset quality deterioration was acute in SME and agri portfolio, few lumpy corporate accounts also exacerbated the asset quality worries of SBI.

  • The bank restructured assets worth Rs 50 bn during the quarter and witnessed as high as 26.4% of the restructured loans slipping into NPA category. Overall, the weak assets of SBI form 8.6% of the total advances.

  • The provision coverage for the bank has fallen to 60% levels in 1QFY14 from 64% same quarter a year ago.

    Breakup of provisions
    Rs (m) 1QFY13 1QFY14 Change
    Loan Loss 26,990 21,510 -20.3%
    Investment depreciation -5,310 -440 -91.7%
    Standard assets 1,630 860 -47.2%
    Others 160 -200 -225.0%
    Total 23,470 21,730 -7.4%

  • The bank's current capital position with total CAR at 11.9% (as per BASEL III) is not up to the mark. This means the capital raising stand imminent in the near future for SBI. The bank expects to raise around Rs 40 bn from the government and if possible may also take up a QIP issuance or a rights issue to beef up its capital base.
What to expect?
At the current price of Rs 1603 the stock of SBI is trading at 1.0 times the FY15 estimates.

The performance of banks is a proxy to the economic condition of a nation. The country's largest lender that accounts for almost 20% of the total advances in the banking sector has observed deterioration in assets on a higher magnitude. The steep increase in bad loans of SBI is indicative of widespread pain in the economy and vice-versa. Besides, SME and agri, many other sectors have failed to show up satisfactory performance.

Besides, poor asset quality, SBI reported dismal performance across all key parameters. The other income growth turned out to be the only saving grace.

Going forward, while SBI's business growth is expected to stay healthy on account of sufficient liquidity, the earnings performance is not expected to revive significantly. The bank expects to record 20% loan growth and 15%-16% deposits growth for the full year. Margins are expected to remain under pressure particularly on account of lack of treasury gains going ahead and strained yields. Higher wage revisions will continue to ensure higher operating costs and subsequently worsening cost-income ratios.

With no respite from bad loans, the return ratios for SBI are expected to remain weak. Despite the attractive valuations of the stock, we would recommend investors to not buy the stock until the NPA concerns are allayed. Given the weak earnings performance for more than couple of quarters now, we would have a re-look at our estimates and update our FY16 target price for the stock by end of August 2013.

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