Maintain Accumulate on SBI - Higher provisions mar bottom‐line; margin decline higher‐than‐expected - Prabhudas Lilladher

Higher provisions mar bottom‐line; margin decline higher‐than‐expected: State Bank of India (SBI) reported net profit of just Rs209mn on account of lower topline growth and higher provisioning requirement during the quarter. Net Interest Income (NII) for the quarter grew by 19.9% YoY but declined by 11.0% QoQ on account of a steep 54bps decline in the reported NIM at 3.07%. However, adjusting for higher interest outgo of Rs2.5bn (due to hike in interest rate on PF from 8.5% to 9.5% from current year and outgo for full year accounted in Q4) during the quarter the margins could have been higher at 3.26%. Moreover, Q3FY11 net interest income included interest on IT refund of Rs2.3bn, adjusting for which the sequential margin decline would have been lower. Adjusting for this, NII growth for the quarter would have been at 23.6% YoY. The decline in NIMs could be traced down to a 34bps QoQ in cost of deposits due to higher interest on term deposits and a 24bps QoQ decline in yield on advances (further clarity awaited on this) despite a 50bps PLR and 65bps base rate hike during the quarter. Staff costs increased by 20% QoQ on account of Rs9.0bn provision towards pension and gratuity. Of the total pension liability of Rs104.0bn, the bank provided for Rs24.7bn through P&L in FY11 and set‐off Rs79.3bn against reserves. Loan loss provision increased by 100% QoQ due to higher slippages during the quarter. Moreover the bank made Rs5.0bn worth provisions towards standard assets on teaser loans as directed by the RBI. In addition to this the effective tax rate for the quarter stood at 99% as most provisions made during the quarter were non‐tax deductible in nature.

Slippages spike up; higher write‐offs restrict increase in gross NPAs: Gross slippages during the quarter increased sharply to Rs56.5bn (3.6% annualized) v/s Rs39.0bn in the last quarter (2.6% annualized – adjusted for unrealised interest of previous years, which was been set off against gross slippages in Q3FY11) due to migration to complete system‐based NPL recognition method (although management did not quantify the same). However, write‐off of loans worth Rs26.7bn v/s Rs14.3bn in Q3FY11 restricted the overall increase in GNPAs during the quarter at just 8.1% QoQ. Provision cover including technical write offs improved marginally to 64.95% v/s 64.07% in Q3FY11. SBI now needs to fulfil a shortfall of Rs11.0bn to achieve 70% provision cover as on September 2010.

Valuations and Outlook:

SBI reported a dismal set of numbers due to steep provisioning requirements and higher than expected margin erosion. However, we believe going forward the margin decline could likely get arrested on two counts a) the bank has hiked its base rate by 100bps since April 2011 and b) around Rs340bn worth high cost deposits bearing rate of ~10.5%‐10.7% raised in 2008 coming up for re‐pricing in Q2 of current fiscal. However, lower capital adequacy and that acting as a constraint for growth going forward is a major concern for the bank. With tier‐I capital ratio of lower than 8% for the largest bank in the country could call for close monitoring by the RBI from a regulatory perspective and hence we believe the rights issue is very critical at this juncture for the bank. All these factors along with steep book value erosion and concerns over asset quality and margins could act as an overhang on the stock in the near term. We believe the stock could witness further 5‐7% downside from current levels. However, this could be seen as an opportune time to enter the stock from a medium to long term perspective. We have revised our earnings estimates downwards by 8.1% and 4.2% For FY12 and FY13 respectively. We maintain our ‘Accumulate' rating on the stock with a revised 15‐month forward price target of Rs2,726. We have factored in rights issue of Rs200bn at an issue price of Rs1,920 per share. Excluding the proceeds from the rights issue our target price on the stock would have been lower by ~Rs200‐250 per share.

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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