State Bank Of India - Disappointing quarter - Religare

State Bank of India's (SBIN) Q4FY11 performance was an all-round disappointment. NII declined ~11% QoQ due to a 54bps QoQ compression in NIMs. Asset quality deteriorated with slippages at 3.5% (as against 2.6% in Q3FY11). The bank also adjusted Rs 79bn of unfunded pension liabilities from reserves, which impacted book value by Rs 125/share. Tier I ratio declined from 9.5% in FY10 to 7.8% in FY11. We pare our FY12/FY13 PAT estimates by 13%/6% to factor in a lower NII and higher provisions. We believe that the stock could underperform its peers in the near term due to concerns on asset quality and margins. However, we remain positive from a long-term prospective due to SBIN's strong liability franchise and competitive positioning in the market. We reduce our PT from Rs 3,500 to Rs 3,000 to account for the bank's lower profitability and net worth reduction. We expect earnings to grow by 43% CAGR through FY13 (albeit on a low base) and ROE (adj. for subsidiaries) to improve from 13.1% in FY11 to 21.5% in FY13.

v Sharp compression in NIMs: Sharp compression in NIMs was due to rise in cost of deposits and one-off expense of Rs 2.5bn. Recent hike in savings and short term deposits rate would put pressure on cost of funds in FY12; however, hike in lending rate and re-pricing benefits on high costs term deposits in Q2FY12 would support margins to some extent. We expect NIMs to decline by 15bps in FY12.

v Asset quality under pressure: NPL provisions grew by 49% YoY due to higher slippages (Fig 7-8). Total provisions are likely to remain high in Q1FY12 as well, as the bank would have to provide Rs 15bn to comply with the revised provisioning requirements on sub-standard/doubtful NPLs and restructured assets. We are factoring in credit costs of 1.08% in FY12 (as against 1.16% in FY11).

v Unfunded pension liability adjusted from reserves: Of the total pension liability of Rs 117bn, SBIN made a provision of Rs 24.7bn in FY11 (Rs 8.8bn in Q4FY11). The bank also had an excess provision of Rs 13bn. The remaining requirement of Rs 79bn was charged to reserves. As a result, net worth declined marginally in FY11. Gratuity liability stood at Rs 20bn, of which Rs ~16bn has already been provided for.

Cutting PT and earnings

At the CMP of Rs 2,415/share, the stock is trading at 1.5x FY12 BV and 9x FY12 EPS (after adjusting for value of subsidiaries). We expect stock to remain under pressure in the near term due to concern on asset quality and margins. We are revising downward our NII estimates by 4%/3% in FY12/FY13 due to lower than expected NIMs. Our PAT estimates are revised lower by 13%/6% due to lower NII and higher provisions. We are reducing our PT from Rs 3,500 to Rs 3,000 per share to factor in lower networth and lower profitability. We note that FY12 BV per share (adjusted for subsidiaries) has declined from Rs 1,268 earlier to Rs 1,075 due to lower PAT in Q4FY11, adjustment of pension liability in reserves and higher dividends.

The stock closed the day at Rs.2355.70, down by Rs.57.90 or 2.40%. The total traded quantity was 14.02 lakhs compared to 2 week average of 7.32 lakhs.

The stock hit an intraday high of Rs.2398 and low of Rs.2331.15.

Source : Equity Bulls

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