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SBI: Asset quality slips further
Nov 9, 2011

State Bank of India (SBI) declared its results for the second quarter of the financial year 2011-12 (2QFY12). The bank has reported 31% YoY growth in interest income and 12% YoY growth in net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 28% YoY in 2QFY12, on the back of a 17% YoY growth in advances.
  • Other income falls by 14% YoY in 2QFY12 on the back of lower fee income and profit on sale of investments.
  • NIMs (net interest margins) move up from 3.3% in 1HFY11 to 3.7% in 1HFY12, as the bank was able to improve its yields.
  • Net NPAs (Non Performing Assets) increased from 1.7% in 1HFY11 to 2.04% in 1HFY12.
  • Net profit rises by 12% YoY in 2QFY12 on a strong growth in NII and lower taxes.
  • Capital adequacy ratio stood at 11.4% (Tier-1 ratio at 7.47%) at the end of 2QFY12 as per Basel II, indicating the need for an urgent capital infusion.

Rs (m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Interest income 198,081 259,671 31.1% 382,602 501,645 31.1%
Interest expense 116,932 155,452 32.9% 228,416 300,431 31.5%
Net Interest Income 81,149 104,219 28.4% 154,186 201,215 30.5%
Net interest margin (%)       3.3% 3.7%  
Other Income 40,052 34,272 -14.4% 76,952 69,615 -9.5%
Other Expense 57,631 63,749 10.6% 106,224 123,662 16.4%
Provisions and contingencies 26,215 33,855 29.1% 41,729 75,424 80.7%
Profit before tax 37,355 40,888 9.5% 83,185 71,743 -13.8%
Tax 12,342 12,784 3.6% 29,030 27,804 -4.2%
Profit after tax/ (loss) 25,014 28,104 12.4% 54,156 43,940 -18.9%
Net profit margin (%) 12.6% 10.8%   14.2% 8.8%  
No. of shares (m)         635.0  
Book value per share (Rs)*         1083.0  
P/BV (x)         1.7  
* (Book value as on 30th September 2011)

What has driven performance in 1HFY12?
  • 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 14% YoY in 1HFY12. In fact, a large chunk of the bank's deposit growth in the past year came in from low cost savings accounts. The country's largest bank continued to reap the advantage of having the largest franchise of bank branches in the country. Its financial inclusion initiatives, especially 'no-frills' accounts helped contribute to the increase. Despite the recent savings bank deregulation, the bank has no plans as of now to increase its deposit rates. It does not feel threatened from a flight of capital to other banks because of its large franchise, and diversified deposit base.

  • With regards to net interest margins (NIM), these saw a strong improvement of 0.4% coming to 3.7% at the end of 1HFY12 from 3.3% at the end of 1HFY11. The bank saw an improvement in its yield on advances, which came in higher than the increase in costs of funds. This was due to its huge the CASA base, the proportion of the same (to total deposits) was sustained at 44.7% in 1HFY12. The bank has so far exceeded its NIM target for FY12, which was estimated at 3.5%. The management is confident of maintaining its full year guidance at these levels, and may even exceed the same. Advance growth was seen across segments and especially in the SME and large corporate segments. Sectors like roads and ports, power and iron and steel continued to see strong growth. It maintains its leadership position in the home loan space, and continues to see strong growth in auto loans. The management is confident of maintaining its 16-18% loan growth target for the year, and hopes for healthy performance in the second half of FY12, which are seasonally better quarters.

    SME and Corporate advances stay strong
    (Rs m) 1HFY11 % of total 1HFY12 % of total Change
    Advances 6,932,240   8,106,120   16.9%
    Agriculture 820,180 11.8% 958,330 11.8% 16.8%
    International 1,054,760 15.2% 1,253,640 15.5% 18.9%
    Retail 1,495,370 21.6% 1,687,610 20.8% 12.9%
    Home Loans 792,750 11.4% 923,830 11.4% 16.5%
    Auto Loans 176,020 2.5% 220,250 2.7% 25.1%
    SME 1,043,870 15.1% 1,260,410 15.5% 20.7%
    Large Corporates 936,790 13.5% 1,133,050 14.0% 21.0%
    Deposits 8,553,450   9,731,710   13.8%
    CASA 3,830,490 44.8% 4,350,400 44.7% 13.6%
    Tem deposits 4,247,250 49.7% 4,822,490 49.6% 13.5%
    Credit deposit ratio 81.0%   83.3%    

  • The bank's fee income showed a decline of 2% YoY, bringing the fee to total income ratio to 19% in 1HFY12 (23% in 1HFY11). Also, due to lower profit on sale of investments, and dividend income (the bank did not take any dividends from subsidiaries), other income saw a 10% YoY decline in 1HFY12. There were also some one-off items seen in the previous quarter last year.

  • The bank's capital adequacy came down to 11.4%, with its Tier-1 ratio at 7.5% at the end of September 2011, compared to 12.5% last year. For the bank to sustain asset growth at the current levels further capital addition is necessary, which may come by way of either a rights issue, preference shares or even a QIP. More clarity however, is still required on the same from the government.

  • Where the bank did see a slip up this time around was on the provisioning account. Provisions increased by 81%. 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 upto the 70% mandated by the RBI for assets upto September 2010, thus further provisioning on this front will not be required. The bank also saw an increase in investment depreciation, especially on domestic equities and mutual funds. Domestic bonds this quarter saw an investment gain, despite an increase in yields on account due to strong treasury management.

    Breakup of provisions
    Rs (m) 1HFY11 1HFY12 Change
    Provisions for loans:
    Loan Loss 38,959 57,029 46.4%
    Investment depreciation 1,335 15,062 1028.3%
    Standard assets 1,205 4,092 239.6%
    Others 230 -759 -430.0%
    Total 41,729 75,424 80.7%

  • SBI felt the heat on its NPAs with gross NPAs rising to 4.2% of advances in 1HFY12 from 3.4% in 1HFY11. Net NPAs also deteriorated to 2.0% (1.7% in 1HFY11), despite increased provisioning. The Bank has reached a provision coverage ratio of 63.5% in 1HFY12, compared to 62.8% at the end of 1HFY11.

  • Slippages under the RBI's restructured assets scheme stood at 23.8% at the end of September 2011. There was a huge spike in the NPAs in the agricultural book which increased from 6.4% to 8.9% of advances in 1HFY12. However towards the second half this may see some improvement as the harvest was late this year. Almost every other counter also saw a spike in NPA accounts, and even large corporate slipped into this category. Delinquencies were higher in export related categories like gems and jewellery, iron and steel etc. The bank however expects to maintain its net-NPA ratio at 1.7% in FY12. The bank has a 4.2% exposure to the power sector, out of which only 0.1% or Rs 12 bn is to distribution companies, which is the segment currently seeing stress. Thus, there is not much to worry on this front. However, with the current macro environment, and high rates prevailing in the market, further stresses can be expected on the overall book.

What to expect?
At the current price of Rs 1862, 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 healthy growth in NII and a sustained improvement in margins. SBI has been able to increase its NIMs even in light of a rising interest rate environment on account of its large CASA base and huge franchise. However, profit growth for the half has come in below par on account of its lackluster performance in the first quarter. Higher NPA provisioning in order to meet RBI guidelines, as well as on account of increase slippages impacted profits this quarter. However, on the plus side, the bank does not have any unamortized pension on its books, which most of its peers still hold. The bank expects the situation to better itself 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. The interest rate environment is still uncertain with the RBI warning that its hawkish stance will continue. 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. However, we believe at these levels most of the negatives have been priced in, and we expect the bank to perform well, given its large franchise, and huge low cost deposit base. We reiterate our 'HOLD' view on the stock.

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