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SBI: Another poor quarter - Views on News from Equitymaster

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SBI: Another poor quarter
Nov 13, 2013

State Bank of India (SBI) declared its results for the second quarter (2QFY14) and first half (1HFY14) of the financial year 2013-14. The net interest income for the quarter grew by 11.6% YoY while the profitability shrunk by almost 35.1% YoY. For the first half, the profits declined 24.2% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 11.6% YoY in 2QFY14 on the back of a 19.2% YoY growth in advances.
  • Other income fell by 2.1% YoY in 2QFY14.
  • NIMs (net interest margins) came down significantly from 3.5% in 1HFY13 to 3.2% in 1HFY14.
  • Net NPAs (Non Performing Assets) increased from 2.4% in 2QFY13 to 2.9% in 2QFY14 marking continued asset quality pressures.
  • Net profit falls significantly by 35.1% YoY in 2QFY14 on account of higher operating costs, higher provisions and poor other income performance 2QFY14.
  • Capital adequacy ratio stood at 11.69% at the end of 1HFY14 as per Basel III norms.


Rs (m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Interest income 296,069 339,221 14.6% 585,293 656,405 12.1%
Interest expense 186,330 216,707 16.3% 364,309 418,772 14.9%
Net Interest Income 109,738 122,514 11.6% 220,984 237,633 7.5%
Net interest margin (%)       3.5% 3.2%  
Other Income 33,466 32,778 -2.1% 68,397 77,521 13.3%
Other Expense 69,668 92,175 32.3% 134,078 176,524 31.7%
Provisions and contingencies 18,256 30,288 65.9% 42,819 58,946 37.7%
Profit before tax 55,281 32,829 -40.6% 112,484 79,683 -29.2%
Tax 18,699 9,079 -51.4% 38,387 23,522 -38.7%
Profit after tax/ (loss) 36,581 23,750 -35.1% 74,097 56,161 -24.2%
Net profit margin (%) 12.4% 7.0%   12.7% 8.6%  
No. of shares (m)         684.0  
Book value per share (Rs)*         1580.9  
P/BV (x)         0.9  
* (Book value as on 30th September 2013)

What has driven performance in 2QFY14?
  • The earnings performance of public sector banks largely reflects the current economic conditions. And given the current turmoil that is being faced by Indian economy, the bleak earnings performance of SBI no longer comes as a shock. Like four previous quarters, SBI continued to face acute pressures on asset quality and ended up with higher provisioning costs; which in turn dragged the profitability. Additionally, higher interest rates, increase in employee headcount and branch network expansion also led to the decline in profits during 2QFY14.

  • The net interest income grew at decent 11.6% YoY for 2QFY14 on the back of 19.2% YoY growth in advances during the quarter. While the loan growth stood decent, it failed to translate into healthy margins on account of increased costs and tepid yields. The margins for the whole bank have come down to 3.19% in 2QFY14 from higher levels of 3.45% same period a year ago. On account of high rates, subdued business environment and asset quality pressures, the margin pressures stand imminent.

  • The loan growth at 19.2% stood better off vis-a-vis other PSU lenders during the second quarter of FY14. The loan book expansion came largely from big corporate (36.2% YoY) and mid-corporate (29.0% YoY) segment followed by higher-yielding retail loans (16.9% YoY).

    Large, Mid-corporates and auto advances stay strong
    (Rs m) 2QFY13 % of total 2QFY14 % of total Change
    Advances 9,560,000   11,393,260   19.2%
    Agriculture 1,090,330 11.4% 1,215,880 10.7% 11.5%
    Retail 1,917,600 20.1% 2,241,680 19.7% 16.9%
    Home Loans 1,093,032 11.4% 1,300,174 11.4% 19.0%
    Auto Loans 210,936 2.2% 269,002 2.4% 27.5%
    SME 1,498,960 15.7% 1,578,960 13.9% 5.3%
    Mid Corp 1,703,910 17.8% 2,197,650 19.3% 29.0%
    Large Corporates 1,459,670 15.3% 1,987,630 17.4% 36.2%
    Deposits 11,336,440   12,924,560   14.0%
    CASA 4,762,140 42.0% 5,262,950 40.7% 10.5%
    Tem deposits 5,831,760 51.4% 6,813,400 52.7% 16.8%
    Credit deposit ratio 84.3%   88.2%    

  • The deposits for the bank grew at 14.0% YoY and the term deposits grew at higher rate of 16.8% YoY during 2QFY14. The CASA deposits growth at 10.5% YoY was backed by increased savings deposits. The current account deposits at 1.5% YoY growth could barely make a mark. Therefore, the CASA ratio for the September quarter 2013 fell down to 43.6% from 45.0% a year ago.

  • September quarter of 2013 also witnessed decline in other income leaving no scope for the bank to put up a good show. And that's because the fee income growth was also at modest 6.8% YoY whereas the growth for all the other non-core components of other income were in the negative.

  • The operating efficiency of SBI continues to weaken. The increased employee headcount and expansion in physical infrastructure took a toll on bank's efficiency with the cost income ratio shooting up to 59.4% for the September quarter 2013. The cost-income ratio stands highest ever in the last 12 years of financial history of SBI.

  • The September quarter of FY14 stands no different from many other previous quarters in terms of asset quality pressures. The gross NPAs jumped to 5.64% in 2QFY14 from 5.15% same period a year ago. The net NPAs too have climbed up to 2.9% in 2QFY14 from 2.5% in 2QFY13. The only respite came on the fresh slippages front, wherein the number declined to Rs 83.6 bn during 2QFY14 from Rs 137.7 bn in 1QFY14. Good monsoons and agri sector pick-up aided in arresting slippages. However, the recoveries fell and the restructured assets rose. The fresh restructured assets were recorded at Rs 85.9 bn during 2QFY14. The maximum pain came from the mid-corporate , agri and SME segment that witnessed higher bad loans during 2QFY14.

  • The provisioning costs continued to remain on the higher side. It jumped dramatically by 65.9% YoY in 2QFY14 37.7% during 1HFY14.
What to expect?
At the current price of Rs 1695 the stock of SBI is trading at 0.9 times our estimated FY16 adjusted book value.

As per the management, the peak of NPA cycle is yet to come. This calls for an alarm signal for the asset quality deterioration of SBI. That said, the incremental slippages have shown a reverse turn and the management is confident to arrest any further decline.

Loan growth continues to remain reasonably healthy and will continue to support the overall strong business performance on account of sufficient liquidity. However, the earnings performance for the bank would continue to remain weak on account of operational inefficiencies and higher provisioning costs. With no respite from bad loans, the return ratios for SBI are expected to remain weak. That said, on a longer-term horizon with revival in economic conditions, SBI's stock is also expected to gather sufficient momentum.

We believe the current valuations of SBI factor in most of the downside risks on account of NPAs. While we recommend investors to buy the stock at current levels or lower, please ensure that the stock does not form more than 3-5% of your stock portfolio.

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