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SBI: Core business remains robust
Aug 17, 2011

State Bank of India (SBI) declared its results for the first quarter of the financial year 2011-12 (1QFY12). The bank has reported 31% YoY growth in interest income and 46% YoY fall in net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 33% YoY in 1QFY12, on the back of a 19% YoY growth in advances.
  • Other income falls by 4% YoY in 1QFY12 on the back of lower forex and dividend income.
  • NIMs (net interest margins) move up from 3.1% in 1QFY11 to 3.6% in 1QFY12, as the bank was able to control its cost of funds.
  • Net NPAs (Non Performing Assets) reduce from 1.7% in 1QFY11 to 1.6% in 1QFY12.
  • Net profit falls by 46% YoY in 1QFY12 as higher provisions on advances reduced its profits.
  • Capital adequacy ratio stood at 11.6% at the end of 1QFY12 as per Basel II, indicating the need for a further capital infusion shortly.

Rs (m) 1QFY11 1QFY12 Change
Interest income 184,521 241,974 31.1%
Interest expense 111,484 144,979 30.0%
Net Interest Income 73,037 96,995 32.8%
Net interest margin (%) 3.1% 3.6%  
Other Income 36,900 35,342 -4.2%
Other Expense 48,593 59,913 23.3%
Provisions and contingencies 15,514 41,569 168.0%
Profit before tax 45,830 30,855 -32.7%
Tax 16,688 15,020 -10.0%
Profit after tax/ (loss) 29,142 15,836 -45.7%
Net profit margin (%) 15.8% 6.5%  
No. of shares (m)   635.0  
Book value per share (Rs)*   1039.0  
P/BV (x)   2.1  
* (Book value as on 30th June 2011)

What has driven performance in 1QFY12?
  • Despite having low cost deposits (CASA-current account and savings account) of the size of the balance sheets of smaller banks in India, SBI managed to grow the same by 19% YoY in 1QFY12. In fact, a large chunk of the bank's deposit growth in the past year came in from low cost accounts. The country's largest bank continued to reap the advantage of having the largest franchise of bank branches in the country.

  • With regards to net interest margins (NIM), these saw an improvement of 0.5% coming to 3.6% at the end of 1QFY12 from 3.1% at the end of 1QFY11. The bank saw an improvement in its yield on advances. The bank recently revised its base rate upwards to 10% from 9.5% earlier. It also revised its Benchmark Prime Lending Rate (BPLR) upwards from 14.25% p.a. to 14.75% p.a. On account of the higher interest rate cycle, and a revision in deposit rates from 3.5% to 4%, the bank saw an increase in its cost of funds. However, since the lending yields also increase, the bank saw an improvement in its NIMs by some measure. This was due to the ramp up in the CASA base, the proportion of the same increased from 44.4% to 45.3% in 1QFY11. The bank has so far exceeded its NIM target for FY12, which was estimated at 3.5%. Advance growth was mainly seen in the metals, and infra space. It continues to be the leader in the home loan space.

    Retail advances stay strong
    (Rs m) 1QFY11 % of total 1QFY12 % of total Change
    Advances 6,638,280   7,881,530   18.7%
    Agriculture 759,530 11.4% 954,520 12.1% 25.7%
    International 1,051,680 15.8% 1,107,120 14.0% 5.3%
    Retail 1,403,150 21.1% 1,651,310 21.0% 17.7%
    Home Loans 746,690 11.2% 898,810 11.4% 20.4%
    Auto Loans 153,970 2.3% 215,450 2.7% 39.9%
    SME 993,170 15.0% 1,203,270 15.3% 21.2%
    Large Corporates 956,030 14.4% 1,141,220 14.5% 19.4%
    Deposits 8,152,970   9,500,720   16.5%
    CASA 3,623,860 44.4% 4,303,580 45.3% 18.8%
    Tem deposits 4,529,110 55.6% 5,197,140 54.7% 14.7%
    Credit deposit ratio 81.4%   83.0%    

  • The bank's fee income showed a growth of 9.3% YoY, bringing the fee to total income ratio to 20% in 1QFY12 (22% in 1QFY11). However, due to lower profit on sale of investments, and forex income, other income saw a 4% YoY decline in 1QFY12.

  • Since SBI took the entire hit on its pension provisioning in FY11, the bank currently does not have any unamortized pension amounts. Thus, there will be no negative surprises on this account going forward.

  • The bank's capital adequacy came down to 11.6%, with its Tier-1 ratio at 7.6% at the end of June 2011, compared to 13.12% last year. In order for the bank to achieve asset growth, a further capital addition is necessary, which may come by way of a rights issue. More clarity however, is still required on the same.

  • Where the bank did see a slip up this time around was on the provisioning account. Provisions increased by a whopping 168%. A large chunk out of the increased provisions on loan loss and standard assets was on account of the RBI's increased provisioning norms, for various classes of assets. The bank has also brought its provisioning coverage ratio close to the 70% mandated by the RBI, thus further provisioning on this front will not be required post 1HFY12. Also, an additional provision of Rs 5.5 bn was made towards the shortfall in countercyclical provisioning buffer which is to be met by September 30, 2011.

  • The bank however had a negative surprise on the investment depreciation front. It saw huge investment depreciation in the quarter, compared to a write back previously. This was mainly on account of an increase in bond yields, which had expanded significantly in June 2011. When bond yield increase, the price of the bonds fall, leading to a fall in the asset's value on the books. It also saw marked to market loses on account of weak equity markets, and the dismal performance of some of the IPOs it invested in.

    Clean up act: Breakup of provisions
    Rs (m) 1QFY11 1QFY12 Change
    Provisions for loans:      
    Loan Loss 17,334 27,817 60.5%
    Imvestment depreciation -2,983 10,479  
    Standard assets 1,059 2,883 172.1%
    Others 104 390 276.3%
    Total 15,514 41,569 168.0%

  • SBI did feel the heat on its NPAs with gross NPAs rising to 3.5% of advances in 1QFY12 from 3.1% in 1QFY11. Net NPAs however improved to 1.6% (1.7% in 1QFY11), on higher provisioning. The Bank has reached a provision coverage ratio of 67.3% in June 2011, compared to 61% at the end of 1QFY11.

  • Slippages under the RBI's restructured assets scheme stood at 20.3% at the end of June 2011. The sharp increase in slippages was also on account of the bank's movement to system based recognition (technology driven) of NPAs (non-performing assets). There was a huge spike in the NPAs in the agricultural book which increased from 4.6% to 7.2% of advances in 1QFY12. It also saw an increase in slippages in the infra and metals space. Retail NPAs however saw a decline. Also, the bank may see some delinquency risks from some of its accounts going forward, especially on account of the RBI's hawkish stance on interest rates. Irrespective, the bank expects to maintain its net-NPA ratio at 1.5% in FY12.

  • Profits were down 46% for the first quarter (1QFY12) on account of the increased NPA provisioning, and depreciation on the investment book. The bank's management however expects to see a better performance going forward from the second half of the year.

What to expect?

At the current price of Rs 2,198, the stock is valued at 1.4 times our estimated FY14 adjusted book value. The bank has seen a robust performance on the core business front, with a health growth in loans and NII. The bank has been able to maintain its NIMs even in light of a rising interest rate environment on account of its large CASA base and huge franchise. However, profit growth has come in much lower than estimates on account of increased provisioning for investment depreciation on account of higher bond yields and volatility in the equity markets. Higher NPA provisioning in order to meet RBI guidelines, as well as on account of increase slippages also impacted profits. However, on the plus side, the bank has moved its assets onto the core banking system completely, and it does not have any unamortized pension on its books. The bank expects the situation to moderate in the second half of the year.

We have factored in a slowdown in balance sheet growth over the next few years, on account of a moderation in credit growth, with higher interest rates etc. However, the interest rate environment is still uncertain with the RBI warning that its hawkish stance will continue. There is also so much uncertainty in the global macro-economy. Thus, there may be some further pains going forward on the NPA front, with incremental slippages seeing an increase. Few other concerns are the timing of the rights issue, as the bank needs additional Tier-1 capital quickly in order to fuel its balance sheet growth. In light of the current performance, we reiterate our negative view on the stock, on account of some further pains expected in the next few quarters.

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