SBI: Asset quality slips further - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

SBI: Asset quality slips further

Nov 9, 2012

State Bank of India (SBI) declared its results for the second quarter of the financial year 2012-13 (2QFY13). The bank has reported 14% YoY growth in interest income and 30% YoY growth in net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 4.7% YoY in 2QFY13, on the back of a 17% YoY growth in advances.
  • Other income falls by 0.6% YoY in 2QFY13 and by 0.8% YoY in 1HFY13.
  • NIMs (net interest margins) move down from 3.7% in 1HFY12 to 3.5% in 1HFY13.
  • Net NPAs (Non Performing Assets) increased from 2.04% in 1HFY12 to 2.44% in 1HFY13. Gross NPAs increased to 5.15% from 4.19% previously.
  • Net profit rises by 30% YoY in 2QFY12 on lower provisioning.
  • Capital adequacy ratio stood at 12.63% (Tier-1 ratio at 8.97%) at the end of 2QFY13 as per Basel II.

Consolidated financial snapshot
Rs (m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Interest income 260,269 296,068 13.8% 502,243 585,235 16.5%
Interest expense 155,452 186,330 19.9% 300,431 364,309 21.3%
Net Interest Income 104,817 109,738 4.7% 201,813 220,927 9.5%
Net interest margin (%)       3.7% 3.5%  
Other Income 33,674 33,466 -0.6% 69,017 68,454 -0.8%
Other Expense 63,749 69,668 9.3% 123,662 134,078 8.4%
Provisions and contingencies 33,855 18,256 -46.1% 75,424 42,819 -43.2%
Profit before tax 40,888 55,281 35.2% 71,744 112,484 56.8%
Tax 12,784 18,699 46.3% 27,804 38,387 38.1%
Profit after tax/ (loss) 28,104 36,581 30.2% 43,940 74,097 68.6%
Net profit margin (%) 10.8% 12.4%   8.7% 12.7%  
No. of shares (m)         671.0  
Book value per share (Rs)*         1370.7  
P/BV (x)         1.6  
* (Book value as on 30th September 2012)

What has driven performance in 1HFY13?
  • 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 9.5% YoY in 1HFY13. A large chunk of the bank's 16.5% 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 44.7% in 1HFY12 to 42% 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 saw a slight decline of 0.2% coming to 3.5% at the end of 1HFY13 from 3.7% earlier. The bank saw its yields on advances increase but costs also came in higher. 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 expects its NIM for the year to come in at around 3.75%.The management is confident of maintaining its full year guidance at these levels. Advance growth was seen across segments and especially in the agri, international 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.
    (Rs m) 1HFY12 % of total 1HFY13 % of total Change
    Advances 8,106,120   9,560,000   17.9%
    Direct agriculture 741,350 9.1% 951,430 10.0% 28.3%
    International 1,253,640 15.5% 1,596,490 16.7% 27.3%
    Retail 1,687,620 20.8% 1,917,600 20.1% 13.6%
    Home Loans 959,470 11.8% 1,083,810 11.3% 13.0%
    Auto Loans 157,790 1.9% 202,410 2.1% 28.3%
    SME 1,277,500 15.8% 1,446,770 15.1% 13.3%
    Mid Corporate 1,577,900 19.5% 1,704,300 17.8% 8.0%
    Large Corporates 1,147,180 14.2% 1,457,700 15.2% 27.1%
    Deposits 9,731,710   11,336,440   16.5%
    CASA 4,350,400 44.7% 4,762,140 42.0% 9.5%
    Tem deposits 4,822,490 49.6% 5,831,760 51.4% 20.9%
    Credit deposit ratio 83.3%   84.3%    

  • The bank's fee income showed a decline of 3% YoY, bringing the fee to total income ratio to 17% in 1HFY13 (19% in 1HFY12). It saw higher profit on sale of investments. However, due to lower profit on sale of investments, and dividend income (the bank did not take much dividends from subsidiaries), other income saw a 0.8% YoY decline in 1HFY12.

  • The bank saw an improvement this time on the provisioning account. In 1HFY13, provisions were down 43% due to a fall in NPA provisioning. The bank saw a writeback of investment depreciation provisioning which also helped.

  • SBI continued to feel the heat on the NPAs front with gross NPAs rising to 5.15% of advances in 1HFY13 from 4.19% in 1HFY12. Net NPAs also deteriorated to 2.44% (2.04% in 1HFY12), despite increased provisioning. The Bank has reached a provision coverage ratio of 62.8% in 1HFY13, compared to 63.5% at the end of 1HFY12. Most of the NPAs are in the small and medium enterprises segments and in the agricultural book.

  • Slippages under the RBI's restructured assets scheme stood at 18.9% at the end of September 2012. In 2QFY13, Rs 47 bn slipped into the restructured category. As of 2QFY13, 5.98% of the net advances were in the stressed category (calculated as net NPAs + restructured standard assets). This is compared to 5.58% in September 11 and it compared favourably with other PSU banks, although SBI does have a larger asset base.

  • The bank saw fresh slippages of Rs 71 bn in the NPA category. There was a huge spike in the NPAs in the SME book which increased from 3.7% to 4.9% of advances in 1HFY13. Almost every other counter also saw a spike in NPA accounts, except for large corporate and retail loans. Delinquencies were higher in trading, textiles, iron and steel, engineering etc. The bank has a 5% exposure to the power sector, out of which a small portion is to discoms. However, with the current macro environment, and high rates still prevailing in the market, further stresses cannot be ruled out on the overall book. Suzlon is one large account yet to be restructured. The Kingfisher account also continues to be stressed. SBI believes that it will take 1-2 quarters more for things to stabilize.

  • The bank's capital adequacy came to 12.63%, with its Tier-1 ratio at 8.97% at the end of September 2012, compared to 11.4% last year. With adding the half year profits the capital adequacy was even more comfortable.

What to expect?
At the current price of Rs 2,156, the stock is valued at 1.4 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 at reasonable levels 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 and restructurings seeing an increase. Some big accounts such as that of Suzlon are yet to be restructured. Capital concerns have been allayed temporarily; however the bank may 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 mainly on NPA concerns. Since meeting the target price, the stock has fallen because of asset quality concerns, which will take 1-2 more quarters to stabilize. We recommend investors to Sell the stock at these levels.

To Read the Full Story, Subscribe or Sign In
To Read the Full Story, Subscribe or Sign In

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms


Jun 24, 2021 12:27 PM