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SBI: NPA woes persist
Nov 8, 2010

SBI declared its 2QFY11 results. The bank has reported 45% YoY growth in net interest income while its net profits have remained flat year on year. Here is our analysis of the results.

Performance summary
  • Interest income grows by 9% YoY in 1HFY11 on the back of 20% YoY growth in advances.
  • Net interest margins improve from 2.4% in 1HFY10 to 3.3% in 1HFY11 led by robust growth in low cost deposit base (CASA).
  • Cost to income ratio reduces from 52% in 1HFY10 to 46% in 1HFY11 due to write back of employee cost provisioning.
  • Gross NPAs (including that of State Bank of Indore) rise to 3.4% from 3.0% in 1HFY10 while net NPAs remain at 1.7%.
  • Capital adequacy ratio at 13.2% (as per Basel II) at the end of 1HFY11. Capital raising scheduled later in FY11.


Standalone financials
Rs (m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Interest Income 177,758 198,080 11.4% 352,486 382,602 8.5%
Interest Expense 121,670 116,932 -3.9% 246,149 228,416 -7.2%
Net Interest Income 56,088 81,148 44.7% 106,337 154,186 45.0%
NIM (%)       2.4% 3.3%  
Other Income 35,251 40,052 13.6% 70,939 76,951 8.5%
Other Expense 42,989 57,630 34.1% 92,187 106,223 15.2%
Provisions and contingencies 10,160 26,215 158.0% 11,888 41,728 251.0%
Profit before tax 38,190 37,355 -2.2% 73,201 83,186 13.6%
Tax 13,289 12,342 -7.1% 24,996 29,029 16.1%
Profit after tax/ (loss) 24,901 25,013 0.4% 48,205 54,157 12.3%
Net profit margin (%) 14.0% 12.6%   13.7% 14.2%  
No. of shares (m)         635.0  
Book value per share (Rs)*         1,137.6  
P/BV (x)         3.0  
* (Book value as on 30th September 2010)

What has driven performance in 2QFY11?
  • SBI continued to reap the advantage of having the largest franchise in the country as the bank managed to garner some large corporate salary accounts and added to its CASA base this fiscal. These led to the bank's low cost deposit (CASA) comprising 39% of the total deposit base. Also what helped buoy the margins of the bank were the re-pricing of term and bulk deposits. While the former were re-priced as much as 3% lower, most of the bulk deposits were retired. The re-pricing helped SBI improve NIMs substantially during the last 12 months. Interestingly, SBI's CASA base is now bigger than the balance sheet size of 50% of banks in India. In rural deposits the proportion of CASA stood at 58%, signifying the impact of financial inclusion.

    The bank had market share of 25% in home loans and 18% in auto loans at the end of September 2010, thus showing its focus on retail lending.

    Retail focus...
    (Rs m) 1HFY10 % of total 1HFY11 % of total Change
    Advances   5,802,370       6,932,240   19.5%
    Agriculture      589,870 10.2%        694,700 10.0% 17.8%
    International      947,760 16.3%     1,054,760 15.2% 11.3%
    Retail   2,491,780 42.9%     3,129,680 45.1% 25.6%
    SME      967,750 16.7%     1,122,470 16.2% 16.0%
    Large corporates      805,210 13.9%        930,630 13.4% 15.6%
    Deposits   7,729,040       8,553,450   10.7%
    CASA   3,105,570 40.2%     3,337,820 39.0% 7.5%
    Term deposits   4,623,470 59.8%     5,215,630 61.0% 12.8%
    Credit/Deposit 75.1%   81.0%    

  • The bank's fee income showed a healthy growth of 35% YoY, bringing the fee to total income ratio to 23% in 1HFY11 from 22% in 1HFY10.

  • Additional hiring combined with additional contribution for pension as well as wage revision had led to the sharp uptick in the cost to income ratio of the bank in FY10. The ratio reduced from 52% in 1HFY10 to 46% in 1HFY11 due to write back of employee cost provisioning.

  • SBI did feel the heat on its NPAs in the past 12 months with gross NPAs rising to 3.4% of advances from 3.0% in 1HFY10. This included the Gross NPAs of State Bank of Indore which stood at 3.9% of advances at the end of FY10. Net NPAs remained at 1.7%. Also, the bank does foresee some delinquency risks in its SME and retail loan books going forward. The provision coverage ratio stood at around 63% in 1HFY11 and the bank needs to bring it up to 70% by 1HFY10. SBI also revealed that of its Rs 168 bn of restructured assets about 15% have turned into NPAs so far.

What to expect?
At the current price of Rs 3,422, the stock is trading at 2.0 times our estimated FY13 standalone adjusted book value. SBI's balance sheet growth continues to remain healthy thanks to its widespread rural and semi-urban presence. Although we anticipate moderate growth in balance sheet in the near term, the bank, given its balance sheet size, penetration and the possibility of merger with associates remains a preferred play for the long term. Having said that the the high delinquency rate is our biggest concern with regard to the bank. Also most of the medium term upsides (ResearchPro subscribers can view latest updates here) are already priced in.

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