State Bank of India (SBI) Banking BUY RETAIL EQUITY RESEARCH

Transcription

1 Q3FY17 RESULT UPDATE Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 GEOJIT RESEARCH Nov-16 Dec-16 Jan-17 Feb-17 RETAIL EQUITY RESEARCH State Bank of India (SBI) Banking BSE CODE: NSE CODE: SBIN Bloomberg CODE: SBIN:IN SENSEX: 28,301 BUY Rating as per Largecap 12months investment period CMP Rs270 TARGET Rs315 RETURN 17% 16 th February, 2017 Steady Performance continues SBI is the largest commercial bank in India with over 1/5th market share of the Indian banking sector. It has a strong domestic presence with more than 16,784 branches and international presence with 198 branches across 37 countries. Business growth remained healthy at 11% YoY mainly led by strong traction in the domestic deposits ( 24% YoY). Net interest income (NII) grew at a modest pace of 8% YoY (in line with expectation) despite 13 bps contraction in NIM to 2.7%. We expect loan book to increase at a CAGR of 10% over FY16-19E led by lending to high rated corporates and strong momentum in retail segment. We estimate net profit to register a strong CAGR of 19% over FY16-19E supported by healthy business growth coupled with declining provisions. We believe the merger of associate banks with SBI will lead to synergy and increase balance sheet strength as well as profitability from a long-term perspective. We believe that SBI is best positioned among public sector banks (PSBs) to capitalise on growth opportunities owing to its strong capital base and relatively lower stressed assets. Hence, we maintain BUY rating on the stock with a revised upward TP of Rs315. Demonetisation drove deposits growth but hampered credit growth Deposits showed healthy growth of 14% YoY, boosted by demonetization. Domestic deposits grew by 24% YoY driven by 35% increase in CASA deposits. Hence, the CASA ratio improved sharply by 385 bps YoY to 46.6%. However, SBI s loan growth was subdued ( 4% YoY) due to ~11% YoY decline in SME loans and muted growth in large corporate loan book. The bank has adopted a cautious approach in lending to SMEs and mid-corporates after witnessing high levels of stress from these segments. In contrast, retail credit continues to grow strongly at 18% YoY. Going forward, we expect advances to grow at a healthy CAGR of 10% over FY16-19E led by strong momentum in retail loan growth. Stake sale in SBI Life boosted earnings NII grew at a modest pace of 8% YoY (in line with expectation) despite net interest margin (NIM) contracted by 13 bps to 2.7% on sharp reduction ( 471 bps) in a loan to deposits ratio (LDR). We expect NIM to remain broadly stable at current levels as SBI continues to pursue loan growth in highly competitive retail and well-rated corporate segments. Non-interest income grew 56% YoY mainly driven by higher treasury gains (2.2x) which include Rs1,760cr from 3.9% stake sale in life insurance subsidiary. Operating expenses increased by 17% YoY owing to demonetisation and pension related expenses. Net profits grew 1.3x YoY albeit on a low base of Q3FY16. We expect net profit to register a strong CAGR of 19% over FY16-19E led by a moderation in provisions coupled with a revival in loan growth. Stable asset quality SBI s asset quality broadly remains stable as Gross/Net non-performing asset (NPA) ratio increased by 9/5 bps sequentially to 7.2%/4.2%. Slippages declined by 14% QoQ mainly due to decline in slippages outside the watchlist. Hence, outstanding watchlist reduced by 31% QoQ to Rs 18,000cr as ~73% of the total corporate slippages came from the watchlist. The bank also took RBI dispensation of additional 90 days NPA recognition for small loan accounts worth ~Rs2,000cr. Higher provisions backed by strong treasury gains helped provision coverage ratio (PCR) to improve by 75 bps QoQ to 62.9%. We expect Gross NPA/Net NPA ratios to improve to 5.7%/2.6% by FY19E led by lower slippages. Merger of associate banks with SBI is on track SBI is likely to merge all its five banking associates into parent by the end of FY17. We expect the merger will lead to synergy and increase balance sheet strength as well as profitability from a long-term perspective. Branch rationalization would be one of the key synergy benefits from the merger. However, we value SBI on a consolidated basis. Hence, the merger will not lead to a change in our target price. Outlook and Valuation SBI has maintained its focus on growth while peers (PSBs) are consolidating their balance sheets. Moreover, we believe that SBI is likely to be a major beneficiary of the economic recovery and is best positioned to capitalise on growth opportunities owing to its strong capital base coupled with relatively lower NPAs. Hence, we continue to maintain a BUY rating on the stock with a revised upward target price (TP) of Rs315 using the sum of the part (SOTP) methodology, where we value its standalone business at Rs251 (P/ABV of 1.4x for FY19E) and subsidiaries at Rs64. Company Data Market Cap (cr) Rs215,604 Outstanding Shares (cr) Free Float 37% Dividend Yield - 52 week high Rs week low Rs151 6m average volume (cr) 1.86 Beta 1.2 Face value Rs1 Shareholding % Q1FY17 Q2FY17 Q3FY17 Promoters FII s MFs/Insti Public Others Total Price Performance 3mth 6mth 1 Year Absolute Return -2.4% 9.7% 72.9% Absolute Sensex 7.6% 0.8% 22.0% Relative Return* -10.1% 8.9% 50.9% *over or under performance to benchmark index SBI Sensex (rebased) Standalone (Rs.cr) FY17E FY18E FY19E Net Interest Income 58,743 65,432 72,186 Growth (%) 3% 11% 10% NIM (%) Pre Pro Profit 46,970 53,655 55,634 Growth (%) 9% 14% 4% Net Profit 11,743 17,108 16,759 Growth (%) 18% 46% -2% EPS Growth (%) 18% 46% -2% P/E P/BV P/ABV RoE (%) RoA (%)

2 Quarterly Financials (Standalone) Profit & Loss Account (Rs cr) Q3FY17 Q3FY16 YoY Growth % Q2FY17 QoQ Growth % Interest Income 43,926 40, , Interest on advances 29,831 28, ,934 (0.3) Income on Investments 12,609 10, , Others 1, , Interest Expense 29,174 26, , Net Interest Income 14,752 13, , Non-Interest Income 9,662 6, , Total Net Income 24,413 19, , Operating Expenses 11,870 10, , Employee Cost 7,137 6, , Other Operating Exp. 4,733 4, ,784 (1.1) Total Income 53,588 46, , Total Expenditure 41,044 37, , Pre-Provisioning profit 12,543 9, , Provisions 8,943 7, , Profit Before Tax 3,600 1, , Tax Net Profit 2,610 1, , EPS - Diluted (Rs) Key Ratios (%) Q3FY17 Q3FY16 YoY bps Q2FY17 QoQ bps Net Interest Margin (13) 2.8 (12) Cost of Funds (44) 5.4 (14) Yield on Advances (18) 8.4 (12) Yield on Investments (90) 7.4 (55) Yield on Funds (40) 8.3 (23) Cost to Income (286) 50.9 (228) Credit to Deposit (471) 79.5 (236) CASA Capital Adequacy (21) Tier I Capital (20) Gross NPA Net NPA Provision Coverage (236) Credit Cost RoE (Ann.) RoA (Ann.) (2) Change in estimates Old estimates New estimates Change % Year / Rs cr FY17E FY18E FY17E FY18E FY17E FY18E Net Interest Income 59,846 66,100 58,743 65, Pre-Provisioning Profit 46,114 52,703 46,970 53, Net Profit 12,378 18,057 11,743 17, EPS (Rs) Sum of the parts (SOTP) valuation Stake (%) Methodology Valuation SBI's Stake Value Per Share (Rs) SBI x FY19E ABV 196, , SBBJ x FY19E ABV 4,296 3,225 4 SBH x FY19E ABV 5,972 5,972 8 SBM x FY19E ABV 2,406 2,165 3 SBP x FY19E ABV 2,888 2,888 4 SBT x FY19E ABV 4,216 3,327 4 SBI Life 70 Recent Stake Sale 46,000 32, Others FY19E 12, % holding discount to subsidiaries -16 Target Price 315 Source: Company, Geojit Research

3 Standalone Financials Profit & Loss Account Y.E March (Rs cr) FY15 FY16 FY17E FY18E FY19E Interest Income 152, , , , ,231 Interest Expense 97, , , , ,045 Net Interest Income 55,015 56,881 58,743 65,432 72,186 % Change Non-Interest Income 22,576 28,158 35,198 39,774 34,802 Net Income 77,591 85,040 93, , ,988 Operating Expenses 38,585 41,782 46,970 51,551 51,354 Total Income 174, , , , ,033 Total Expenditure 135, , , , ,400 Pre-Provisioning Profit 39,006 43,257 46,970 53,655 55,634 % Change Provisions 19,692 29,484 30,787 27,738 30,245 Profit Before Tax 19,314 13,774 16,183 25,917 25,389 Tax 6,212 3,823 4,440 8,809 8,630 Tax Rate (%) Net Profit 13,102 9,950 11,743 17,108 16,759 % Change 20.3 (24.1) (2.0) No. of Shares (cr) EPS (Rs) % Change 20.3 (27.0) (2.0) Balance Sheet Y.E March (Rs cr) Liabilities FY15 FY16 FY17E FY18E FY19E Capital Reserves & Surplus 127, , , , ,532 Deposits 1,576,793 1,730,722 2,038,341 2,215,050 2,457,324 Borrowings 205, , , , ,726 Other Liabilities & Provisions 137, , , , ,796 Total Liabilities 2,048,080 2,259,063 2,635,053 2,871,394 3,184,154 Assets Cash & Balances 174, , , , ,732 Investments 495, , , , ,490 Advances 1,300,026 1,463,700 1,558,841 1,706,931 1,920,297 Fixed Assets 9,329 10,389 42,747 42,747 42,747 Other Assets 68, , , , ,887 Total Assets 2,048,080 2,259,063 2,635,053 2,871,394 3,184,154 Ratios Y.E March (Rs cr) FY15 FY16 FY17E FY18E FY19E EPS DPS BV ABV Valuation (%) P/E P/BV P/ABV Div. Yield Spreads (%) Yield on Advances Yield on Investments Yield on Funds Cost of Funds Capital (%) CAR Tier I Tier II Asset (%) GNPA NNPA PCR Management (%) Credit/ Deposit Cost/ Income CASA Earnings (%) NIM ROE ROA

4 Recommendation Summary (last 3 years) Dates Rating Target April 2014 HOLD May 2014 HOLD February 2015 BUY July 2015 BUY January 2016 BUY February 2016 BUY August 2016 BUY November 2016 BUY February 2017 BUY Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Source: Bloomberg, Geojit Research *Initiating Coverage Investment Rating Criteria Large Cap Stocks; Mid Cap and Small Cap; Buy - Upside is 10% or more. Buy - Upside is 15% or more. Hold - Upside or downside is less than 10%. Accumulate* - Upside between 10% - 15%. Reduce - Downside is 10% or more. Hold - Absolute returns between 0% - 10%. Reduce/Sell - Absolute returns less than 0%. To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. * For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. Geojit Financial Services Limited has outsourced the preparation of this research report to DION Global Solutions Limited whose relevant disclosures are available hereunder. However, Geojit s research desk has reviewed this report for any untrue statement of material fact or any false or misleading information. General Disclosures and Disclaimers CERTIFICATION I, Kaushal Patel, employee of Dion Global Solutions Limited (Dion) is engaged in preparation of this report and hereby certify that all the views expressed in this research report (report) reflect my personal views about any or all of the subject issuer or securities. Disclaimer This report has been prepared by Dion and the report & its contents are the exclusive property of the Dion and the client cannot tamper with the report or its contents in any manner and the said report, shall in no case, be further distributed to any third party for commercial use, with or without consideration. Geojit Financial Services Limited has outsourced the assignment of preparation of this report to Dion. Recipient shall not further distribute the report to a third party for a commercial consideration as this report is being furnished to the recipient solely for the purpose of information. Dion has taken steps to ensure that facts in this report are based on reliable information but cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this report. It is hereby confirmed that wherever Dion has employed a rating system in this report, the rating system has been clearly defined including the time horizon and benchmarks on which the rating is based. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this report is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. Dion has not taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. This report is not to be relied upon in substitution for the exercise of independent judgment. Opinions or estimates expressed are current opinions as of the original publication date appearing on this report and the information, including the opinions and estimates contained herein, are subject to change without notice. Dion is under no duty to update this report from time to time. Dion or its associates including employees engaged in preparation of this report and its directors do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of securities, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. The investments or services contained or referred to in this report may not be suitable for all equally and it is recommended that an independent investment advisor be consulted. In addition, nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to individual circumstances or otherwise constitutes a personal recommendation of Dion.

5 REGULATORY DISCLOSURES: Dion is engaged in the business of developing software solutions for the global financial services industry across the entire transaction lifecycle and interalia provides research and information services essential for business intelligence to global companies and financial institutions. Dion is listed on BSE Limited (BSE) and is also registered under the SEBI (Research Analyst) Regulations, 2014 (SEBI Regulations) as a Research Analyst vide Registration No. INH Dion s activities were neither suspended nor has it defaulted with requirements under the Listing Agreement and / or SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 with the BSE in the last five years. Dion has not been debarred from doing business by BSE / SEBI or any other authority. In the context of the SEBI Regulations, we affirm that we are a SEBI registered Research Analyst and in the course of our business, we issue research reports /research analysis etc that are prepared by our Research Analysts. We also affirm and undertake that no disciplinary action has been taken against us or our Analysts in connection with our business activities. In compliance with the above mentioned SEBI Regulations, the following additional disclosures are also provided which may be considered by the reader before making an investment decision: 1. Disclosures regarding Ownership Dion confirms that: (i) It/its associates have no financial interest or any other material conflict in relation to the subject company (ies) covered herein at the time of publication of this report. (ii) It/its associates have no actual / beneficial ownership of 1% or more securities of the subject company (ies) covered herein at the end of the month immediately preceding the date of publication of this report. Further, the Research Analyst confirms that: (i) He, his associates and his relatives have no financial interest in the subject company (ies) covered herein, and they have no other material conflict in the subject company at the time of publication of this report. (ii) He, his associates and his relatives have no actual/beneficial ownership of 1% or more securities of the subject company (ies) covered herein at the end of the month immediately preceding the date of publication of this report. 2. Disclosures regarding Compensation: During the past 12 months, Dion or its Associates: (a) Have not managed or co-managed public offering of securities for the subject company (b) Have not received any compensation for investment banking or merchant banking or brokerage services from the subject company (c) Have received compensation for products or services other than investment banking or merchant banking or brokerage services from the subject (d) Have not received any compensation or other benefits from the subject company or third party in connection with this report. 3. Disclosure regarding the Research Analyst s connection with the subject company: It is affirmed that I, Kaushal Patel, employed as Research Analyst by Dion and engaged in the preparation of this report have not served as an officer, director or employee of the subject company 4. Disclosure regarding Market Making activity: Neither Dion /its Research Analysts have engaged in market making activities for the subject company. Copyright in this report vests exclusively with Dion. Please ensure that you have read the Risk Disclosure Documents for Capital Market and Derivatives Segments as prescribed by the Securities and Exchange Board of India before investing. Geojit Financial Services Ltd. (formerly known as Geojit BNP Paribas Financial Services Ltd.), Registered Office: 34/659-P, Civil Line Road, Padivattom, Kochi , Kerala, India. Phone: , Fax: , Website: geojit.com. For investor queries: customercare@geojit.com, For grievances: grievances@geojit.com, For compliance officer: compliance@geojit.com. Corporate Identity Number: L67120KL1994PLC008403, SEBI Regn.Nos.: NSE: INB/INF/INE I BSE:INB & INF MSEI: INE , INB & INF , Research Entity SEBI Reg No: INH , Investment Adviser SEBI Reg No: INA , Portfolio Manager:INP , NSDL: IN-DP-NSDL-24-97, CDSL: IN-DP-CDSL , ARN Regn.Nos:0098, IRDA Corporate Agent (Composite) No.: CA0226. Research Entity SEBI Registration Number: INH