Superior liability franchise; strong margin improvement
Return ratios set to improve; expect earnings CAGR of 27% over FY11-13
SBIN has shown marked improvement in its core operating performance under the leadership of its
new Chairman. On the back of strong CASA traction and timely rate hike, NIM has rebounded to
3.5%+. Although slippages remain high, higher recoveries and upgradations in 2HFY12 should lead
to lower credit costs. Lower incremental credit costs, strong NIM and operating leverage are the
levers to drive better quality of earnings. We expect RoA to increase from 0.7% in FY11 to ~0.9% in
FY12-13 and RoE to improve from ~13% in FY11 to 17%.
Rapid branch addition and technological advancement boost CASA: SBIN enjoys a competitive
edge over its peers due to its strong liability franchise of over 13,000 branches on a standalone basis and
over 17,000 branches at the group level. SBIN’s branch expansion, technological advancement and marketing
efforts led to CASA CAGR of 21% over FY06-11.
Sharp improvement in NIM: High CASA ratio provides cushion to margins in a high interest rate scenario.
Continued re-pricing of 1,000-day deposits and increase in lending rates (175bp hike in FY12YTD, SBI
still has the lowest base rate) will provide cushion to margins. SBIN’s focus on improving income through
NIM rather than fee income and profitable growth has started yielding results. We factor in ~25bp increase
in blended margins (the only large bank to show a sharp improvement) in FY12.
Operating leverage to boost earnings: SBI has made large investments in CBS/technology, staff
additions and branch/ATM expansions. It will reap the benefits in FY12-13, driving strong and profitable
growth. We model in opex CAGR of ~18%. C/I ratio should improve to 47.2% by FY13.
Credit costs to decline; one-off provisions impacted earnings: While slippages continue to be high,
the management’s focus on upgrades and recoveries will lead to lower net slippages and lower credit
costs over FY12-13. With one-off provisions for change in NPA guidelines and restructured loan behind
(only one-off provision that remains to be made are INR5.5b) provisions are likely to come down substantially,
and 2HFY12 earnings are likely to come to a sustainable range. On a conservative basis, we model in
credit costs of 1.1-1.2% for FY12 and FY13 against an average of 0.6% over FY05-11, despite which our
earnings CAGR estimate is a strong at 27% over FY11-13E. Maintain Buy with a target price of INR2,810.
CASA ratio best in the industry; time to reap benefits of branch expansion
SBIN has delivered commendable performance
on the CASA front. Its CASA base has grown
at a CAGR of 21% over FY06-11, translating
into a healthy CASA ratio of~48% currently.
On the back of strong CASA deposit accretion
in the last few years, SBIN's CASA ratio at
~48% is among the highest in the industry.
Moreover, it has taken a smart lead over its
second closest PSU counterpart, PNB, which
has a CASA ratio of ~37%.
SBIN has invested significant resources in
expanding its branch network at a rapid pace in
the past four years. During FY08-11, SBIN
added ~4,400 branches, translating into an
average annual branch addition of ~1,100 as
against just 230 branches during FY02-07.
SBIN reported steep increase in slippages in
FY11, driven by higher slippages in the agri and
SME segment. We expect slippages to
moderate, going forward, resulting in lower
credit costs.
1QFY12: NIM improves sharply; slippages partly off-set by upgrades and recoveries
In 1QFY12, reported NIM expanded 55bp QoQ
to 3.62%, led by 56bp QoQ increase in domestic
NIM and 35bp QoQ increase in overseas NIM.
The management maintains its margin guidance
of 3.5% for FY12 v/s 3.3% for FY11.
Overall increase in yield on loans (+93bp QoQ;
calculated) outpaced the increase in cost of
deposits (+22bp; calculated). SBI raised its base
rate by 65bp in 4QFY11, followed by 100bp in
1QFY12. Cumulatively, SBI has hiked its base
rate by 175bp since March 2011 and 240bp since
3QFY11.
In 1QFY12, gross slippages remained elevated
at INR62b. The annualized slippage ratio for
1QFY12 was 3.3% v/s 3.6% in 4QFY11.
Higher slippages were led by the agri and SME
segment. The SME segment contributed ~32%
of slippages during the quarter.
In 1QFY12, while slippages remained elevated,
improvement in upgradations and cash
recoveries continued, which is a positive
surprise (INR30.8b v/s INR26.7b in 4QFY11
and INR21.6b in 1QFY11). We expect upgrades
and recoveries to increase in 2HFY12, resulting
in lower net slippages.
SME and agri contribute to higher slippages
SME and agri have been the two major
segments contributing to higher slippages for
SBI. On an average, for the past five quarters,
nearly 50% of the quarterly slippages have been
contributed by these two segments, which is a
cause of concern. The agri and SME segments
put together contribute ~27% of the outstanding
loan book.
SBIN's renewed focus on recoveries from bad
accounts has started yielding results, with
upgrades and recoveries as a proportion of gross
slippages increasing over the past few quarters
and now constituting ~50% of gross slippages.
We expect this trend to continue in 2HFY12 as
well, which should keep net slippages under
control.
As a result of the higher slippages, the agri and
SME segments continue to be dominant
contributors of GNPAs, as well. Notably, the
proportion of gross NPAs from the retail
segment has been declining
Recent profits impacted by high one-off provisions
Higher one-off provisions impacted SBIN's
profitability in the last few quarters. Provisions
to increase PCR to 70% as on September 2010
and provisions on change in guidelines on
standard restructured loans and NPA
cumulatively impacted SBIN's PBT by INR46b
over the past five quarters.
With one-off provisions for change in NPA
guidelines and restructured loans behind, (only
one-off provision that remains to be made is of
INR5.5b), provisions are likely to fall
substantially.
Increase in pension liability was a one-off item
and is unlikely to recur. The impact of pension
liability was larger, as a wage hike was
implemented on retrospective basis since
November 2007. In future, SBIN is likely to
provide for such hikes on an ongoing basis, at
least partially. Therefore, we do not expect
negative surprises. One-off provisions also led
to higher tax rates, which will decline in FY13
Return ratios set to improve; expect earnings CAGR of 27% over FY11-13
SBIN has shown marked improvement in its core operating performance under the leadership of its
new Chairman. On the back of strong CASA traction and timely rate hike, NIM has rebounded to
3.5%+. Although slippages remain high, higher recoveries and upgradations in 2HFY12 should lead
to lower credit costs. Lower incremental credit costs, strong NIM and operating leverage are the
levers to drive better quality of earnings. We expect RoA to increase from 0.7% in FY11 to ~0.9% in
FY12-13 and RoE to improve from ~13% in FY11 to 17%.
Rapid branch addition and technological advancement boost CASA: SBIN enjoys a competitive
edge over its peers due to its strong liability franchise of over 13,000 branches on a standalone basis and
over 17,000 branches at the group level. SBIN’s branch expansion, technological advancement and marketing
efforts led to CASA CAGR of 21% over FY06-11.
Sharp improvement in NIM: High CASA ratio provides cushion to margins in a high interest rate scenario.
Continued re-pricing of 1,000-day deposits and increase in lending rates (175bp hike in FY12YTD, SBI
still has the lowest base rate) will provide cushion to margins. SBIN’s focus on improving income through
NIM rather than fee income and profitable growth has started yielding results. We factor in ~25bp increase
in blended margins (the only large bank to show a sharp improvement) in FY12.
Operating leverage to boost earnings: SBI has made large investments in CBS/technology, staff
additions and branch/ATM expansions. It will reap the benefits in FY12-13, driving strong and profitable
growth. We model in opex CAGR of ~18%. C/I ratio should improve to 47.2% by FY13.
Credit costs to decline; one-off provisions impacted earnings: While slippages continue to be high,
the management’s focus on upgrades and recoveries will lead to lower net slippages and lower credit
costs over FY12-13. With one-off provisions for change in NPA guidelines and restructured loan behind
(only one-off provision that remains to be made are INR5.5b) provisions are likely to come down substantially,
and 2HFY12 earnings are likely to come to a sustainable range. On a conservative basis, we model in
credit costs of 1.1-1.2% for FY12 and FY13 against an average of 0.6% over FY05-11, despite which our
earnings CAGR estimate is a strong at 27% over FY11-13E. Maintain Buy with a target price of INR2,810.
CASA ratio best in the industry; time to reap benefits of branch expansion
SBIN has delivered commendable performance
on the CASA front. Its CASA base has grown
at a CAGR of 21% over FY06-11, translating
into a healthy CASA ratio of~48% currently.
On the back of strong CASA deposit accretion
in the last few years, SBIN's CASA ratio at
~48% is among the highest in the industry.
Moreover, it has taken a smart lead over its
second closest PSU counterpart, PNB, which
has a CASA ratio of ~37%.
SBIN has invested significant resources in
expanding its branch network at a rapid pace in
the past four years. During FY08-11, SBIN
added ~4,400 branches, translating into an
average annual branch addition of ~1,100 as
against just 230 branches during FY02-07.
SBIN reported steep increase in slippages in
FY11, driven by higher slippages in the agri and
SME segment. We expect slippages to
moderate, going forward, resulting in lower
credit costs.
1QFY12: NIM improves sharply; slippages partly off-set by upgrades and recoveries
In 1QFY12, reported NIM expanded 55bp QoQ
to 3.62%, led by 56bp QoQ increase in domestic
NIM and 35bp QoQ increase in overseas NIM.
The management maintains its margin guidance
of 3.5% for FY12 v/s 3.3% for FY11.
Overall increase in yield on loans (+93bp QoQ;
calculated) outpaced the increase in cost of
deposits (+22bp; calculated). SBI raised its base
rate by 65bp in 4QFY11, followed by 100bp in
1QFY12. Cumulatively, SBI has hiked its base
rate by 175bp since March 2011 and 240bp since
3QFY11.
In 1QFY12, gross slippages remained elevated
at INR62b. The annualized slippage ratio for
1QFY12 was 3.3% v/s 3.6% in 4QFY11.
Higher slippages were led by the agri and SME
segment. The SME segment contributed ~32%
of slippages during the quarter.
In 1QFY12, while slippages remained elevated,
improvement in upgradations and cash
recoveries continued, which is a positive
surprise (INR30.8b v/s INR26.7b in 4QFY11
and INR21.6b in 1QFY11). We expect upgrades
and recoveries to increase in 2HFY12, resulting
in lower net slippages.
SME and agri contribute to higher slippages
SME and agri have been the two major
segments contributing to higher slippages for
SBI. On an average, for the past five quarters,
nearly 50% of the quarterly slippages have been
contributed by these two segments, which is a
cause of concern. The agri and SME segments
put together contribute ~27% of the outstanding
loan book.
SBIN's renewed focus on recoveries from bad
accounts has started yielding results, with
upgrades and recoveries as a proportion of gross
slippages increasing over the past few quarters
and now constituting ~50% of gross slippages.
We expect this trend to continue in 2HFY12 as
well, which should keep net slippages under
control.
As a result of the higher slippages, the agri and
SME segments continue to be dominant
contributors of GNPAs, as well. Notably, the
proportion of gross NPAs from the retail
segment has been declining
Recent profits impacted by high one-off provisions
Higher one-off provisions impacted SBIN's
profitability in the last few quarters. Provisions
to increase PCR to 70% as on September 2010
and provisions on change in guidelines on
standard restructured loans and NPA
cumulatively impacted SBIN's PBT by INR46b
over the past five quarters.
With one-off provisions for change in NPA
guidelines and restructured loans behind, (only
one-off provision that remains to be made is of
INR5.5b), provisions are likely to fall
substantially.
Increase in pension liability was a one-off item
and is unlikely to recur. The impact of pension
liability was larger, as a wage hike was
implemented on retrospective basis since
November 2007. In future, SBIN is likely to
provide for such hikes on an ongoing basis, at
least partially. Therefore, we do not expect
negative surprises. One-off provisions also led
to higher tax rates, which will decline in FY13
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