Q2FY17 RESULT UPDATE GEOJIT BNP PARIBAS Research RETAIL EQUITY RESEARCH State Bank of India (SBI) Banking BSE CODE: 500112 NSE CODE: SBIN Bloomberg CODE: SBIN:IN SENSEX: 26,228 BUY Rating as per Large cap 12months investment period CMP Rs278 TARGET Rs310 RETURN 12% 17 th November 2016 Outlook getting better SBI is the largest commercial bank in India with over 1/5 th market share of the Indian banking sector. It has a strong domestic presence with 17,142 branches and international presence with 198 branches across 36 countries. Business growth remained healthy at 11% YoY mainly led by strong traction in the retail segment. Though NII increased marginally by 1.3% YoY, operating profit increased at a moderate pace of 9.3% YoY on the back of strong growth of 35.9% YoY in other income. Gross NPA ratio increased marginally by 20 bps sequentially to 7.1% due to slightly higher slippages of Rs11,852cr (Rs10,797cr in Q1FY17). We expect advances to increase at a CAGR of 13% over FY16-18E led by lending to high rated corporates and retail segment. We estimate net profit to register a strong CAGR of 34.7% over FY16-18E supported by healthy business growth coupled with declining provisioning expenses. SBI is best placed among PSU banks to capitalize 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 upwards TP of Rs310. Retail segment continued to drive business Deposits growth stood healthy at 14% YoY mainly due to higher growth in CASA deposits ( 16.0% YoY). Hence, CASA ratio increased by 50 bps YoY to 42.7%. Loan growth remained weak at 7% YoY due to slower growth in corporate and SME loans while retail loan growth remained strong at 21% YoY. Going forward, we expect advances to grow at a healthy CAGR of 11% over FY16-18E led by strong momentum in retail loan growth and lending to high rated corporates. Profitability to improve significantly Net Interest Income (NII) increased marginally by 1.3% YoY as the bank s net interest margin (NIM) declined by 22 bps YoY to 2.8% on the back of a sharp decline in yield on loans due to higher non-performing loans (NPLs) and incremental disbursements to low yielding corporates. However, operating profit of the bank increased by 9.3% YoY helped by one off fee income of Rs800cr (service tax refund) and higher trading gains ( 53.4% YoY). However, the bank prudently used this one-off gain to make higher provisions at Rs7,897cr ( 81.1% YoY). Further, the bank also has countercyclical provisions of Rs11,500cr. Going forward, we expect net profit to increase at a strong CAGR of 34.7% over FY16-18E supported by decline in credit cost to 1.5% in FY18E from 2.0% in FY16. Well placed on asset quality front Gross/Net NPA ratios increased 20/14 bps QoQ to 7.1%/4.2%, sequentially due to marginally higher slippages of Rs11,852cr as compared to Rs10,797cr in Q1FY17. However, it was broadly in line with the annual guidance of Rs40,000cr. The outstanding watch list reduced to Rs26,000cr from Rs31,000cr QoQ. Hence, total stressed loans now account for 11.7% of loans which is the lowest among public sector banks (PSBs). We expect Gross NPA and Net NPA ratios to improve to 5.9% and 3.0% by FY18E led by lower slippages. Further, the management expects large steel accounts to be resolved over the next few quarters once RBI announce a few more changes to the scheme for sustainable structuring of stressed assets (S4A). Outlook & Valuation We expect the asset quality trend to improve gradually over the next few quarters which will translate to strong bottom-line growth (34.7% CAGR over FY16-18E). Overall, we believe that SBI is best placed among PSU banks to capitalize on growth opportunities owing to its strong capital base. Further, we have not factored in the positive impact of demonetisation on SBI s earnings which can be substantial. Hence, we continue to maintain BUY rating with a revised upwards TP of Rs310 using sum of the part (SOTP) methodology, where we value its standalone business at Rs260 (P/ABV of 1.6x for FY18E) and subsidiaries at Rs50. (Previous TP: Rs284) Company Data Market Cap (Rs cr) 215,534 Outstanding Shares (cr) 776 Free Float 37% Dividend Yield 0.9 52 week high Rs289 52 week low Rs148 6m average volume (cr) 2.4 Beta 1.6 Face value Rs1 Shareholding % Q4 FY16 Q1 FY17 Q2 FY17 Promoters 61.3 61.3 61.2 FII s 9.3 9.0 9.5 MFs/Insti 19.1 19.8 19.6 Public& Others 10.3 9.9 9.7 Total 100.0 100.0 100.0 Price Performance 3mth 6mth 1 Year Absolute Return 12.8% 56.8% 12.0% Absolute Sensex -6.3% 1.8% 1.4% Relative Return* 19.1% 55.1% 10.6% *over or under performance to benchmark index Y.E Mar (Rscr) FY16 FY17E FY18E Net Interest Income 56,881 59,846 66,100 Growth (%) 3% 5% 10% NIM (%) 3.0 2.9 2.8 Pre Pro Profit 43,257 46,114 52,703 Growth (%) 11% 7% 14% Net Profit 9,950 12,378 18,057 Growth (%) -24% 24% 46% EPS 12.8 15.9 23.3 Growth (%) -27% 24% 46% P/E 21.7 17.4 11.9 P/BV 1.5 1.2 1.1 P/ABV 2.5 1.9 1.7 RoE (%) 7.3 7.8 9.9 RoA (%) 0.5 0.5 0.7
Quarterly Financials (Standalone) Profit & Loss Account (Rs cr) Q2FY17 Q2FY16 YoY Growth % Q1FY17 QoQ Growth % Interest Income 42,319 40,658 4.1 41,594 1.7 Interest on advances 29,934 28,982 3.3 29,884 0.2 Income on Investments 11,385 10,565 7.8 10,704 6.4 Others 1,000 1,111 (10.0) 1,005 (0.6) Interest Expense 27,881 26,405 5.6 27,281 2.2 Net Interest Income 14,437 14,253 1.3 14,312 0.9 Non-Interest Income 8,424 6,197 35.9 7,335 14.8 Total Net Income 22,862 20,450 11.8 21,647 5.6 Operating Expenses 11,637 10,184 14.3 10,594 9.9 Employee Cost 6,853 6,142 11.6 6,257 9.5 Other Operating Exp. 4,784 4,042 18.4 4,337 10.3 Total Income 50,743 46,855 8.3 48,929 3.7 Total Expenditure 39,519 36,589 8.0 37,875 4.3 Pre-Provisioning profit 11,224 10,266 9.3 11,054 1.5 Provisions 7,897 4,361 81.1 7,413 6.5 Profit Before Tax 3,328 5,905 (43.7) 3,641 (8.6) Tax 789 2,026 (61.0) 1,120 (29.5) Net Profit 2,538 3,879 (34.6) 2,521 0.7 EPS - Diluted (Rs) 3.3 5.0 (34.6) 3.2 0.7 Key Ratios (%) Q2FY17 Q2FY16 YoY bps Q1FY17 QoQ bps NIM 2.8 3.0 (22) 2.9 (8) Cost of Fund 5.4 5.7 (29) 5.5 (7) Yield on Advances 8.4 8.9 (46) 8.3 10 Yield on Investment* 7.4 7.5 (12) 8.0 (67) Yield on Fund 8.3 8.7 (40) 8.4 (15) Cost to Income* 50.9 49.8 110 48.9 197 Credit to Deposit* 77.1 81.8 (471) 79.5 (236) CASA 42.7 42.2 50 42.8 (4) CAR 13.9 12.2 177 14.0 (7) Tier I Capital 10.9 9.9 94 10.8 3 GNPA 7.1 4.2 299 6.9 20 NNPA 4.2 2.1 205 4.1 14 Provision Coverage 0.0 0.0 0 0.0 0 Credit Cost 2.2 1.3 90 2.1 11 ROE (Ann.) 5.6 11.0 (538) 6.2 (60) ROA (Ann.) 0.4 0.7 (31) 0.4 (1) Sum of the parts (SOTP) valuation Stake (%) Methodology Valuation SBI's Stake Value Per Share (Rs) SBI 100 1.6x FY18E ABV 196,523 196,523 260 SBBJ 75 0.5x FY18E ABV 3,009 2,259 3 SBH 100 0.5x FY18E ABV 4,186 4,186 5 SBM 90 0.5x FY18E ABV 1,738 1,564 2 SBP 100 0.5x FY18E ABV 2,265 2,265 3 SBT 79 0.5x FY18E ABV 3,165 2,498 3 Others 48,685 36,485 47 20% holding discount to subsidiaries (13) Target Price 310 Source: Company, Geojit BNP Paribas Research Old estimates New estimates Change % Year / Rscr FY17E FY18E FY17E FY18E FY17E FY18E NII 63,049 68,042 59,846 66,100-5.1-2.9 PAT 13,593 18,624 12,378 18,057-8.9-3.0 EPS 17.5 24.0 15.9 23.3-8.9-3.1
Standalone Financials Profit & Loss Account Y.E March (Rs cr) FY14 FY15 FY16 FY17E FY18E Interest Income 136,351 152,397 163,685 166,815 185,998 Interest Expense 87,069 97,382 106,804 106,969 119,899 Net Interest Income 49,282 55,015 56,881 59,846 66,100 % Change 11.2 11.6 3.4 5.2 10.4 Non-Interest Income 18,553 22,576 28,158 32,382 37,239 Net Income 67,835 77,591 85,040 92,228 103,339 Operating Expenses 35,726 38,585 41,782 46,114 50,636 Total Income 154,904 174,973 191,844 199,197 223,238 Total Expenditure 122,794 135,967 148,586 153,083 170,535 Pre-Prov. Profit 32,109 39,006 43,257 46,114 52,703 % Change 3.3 21.5 10.9 6.6 14.3 Provisions 15,935 19,692 29,484 28,431 26,908 Profit Before Tax 16,174 19,314 13,774 17,683 25,795 Tax 5,283 6,212 3,823 5,305 7,739 Tax Rate (%) 33 32 28 30 30 Net Profit 10,891 13,102 9,950 12,378 18,057 % Change (22.8) 20.3 (24.1) 24.4 45.9 No. of Shares (cr) 747 747 776 776 776 EPS (Rs) 14.6 17.5 12.8 15.9 23.3 % Change (29.3) 20.3 (27.0) 24.4 45.9 Balance Sheet Y.E March (Rs cr) FY14 FY15 FY16 FY17E FY18E Liabilities Capital 747 747 776 776 776 Reserves & Surplus 117,536 127,692 143,498 174,190 187,734 Deposits 1,394,409 1,576,793 1,730,722 1,971,759 2,178,261 Borrowings 183,131 205,150 224,191 249,731 285,691 Other Liabilities & Provisions 98,748 137,698 159,876 183,622 208,594 Total Liabilities 1,794,570 2,048,080 2,259,063 2,580,077 2,861,056 Assets Cash & Balances 132,550 174,861 167,468 177,954 230,896 Investments 398,308 495,027 477,097 610,127 614,270 Advances 1,209,829 1,300,026 1,463,700 1,626,026 1,855,133 Fixed Assets 8,002 9,329 10,389 42,725 42,725 Other Assets 45,881 68,836 140,408 123,245 118,032 Total Assets 1,794,570 2,048,080 2,259,063 2,580,077 2,861,056 Ratios Y.E March (Rs) FY14 FY15 FY16 FY17E FY18E EPS 14.6 17.5 12.8 15.9 23.3 DPS 3.4 3.5 2.6 2.6 2.6 BV 158.4 172.0 185.9 225.4 242.8 ABV 116.8 135.1 111.1 144.3 159.2 Valuation (%) P/E 19.0 15.8 21.7 17.4 11.9 P/BV 1.8 1.6 1.5 1.2 1.1 P/ABV 2.4 2.1 2.5 1.9 1.7 Div. Yield 1.2 1.3 0.9 0.9 0.9 Spreads (%) Yield on Advances 9.1 9.0 8.4 8.1 7.9 Yield on Investments 8.5 8.2 8.7 7.0 6.9 Yield on Funds 9.1 9.0 8.8 8.0 7.9 Cost of Funds 5.9 5.8 5.7 5.1 5.1 Capital (%) CAR 12.4 12.0 13.1 12.1 11.5 Tier I 9.7 9.6 9.9 10.0 9.5 Tier II 2.7 2.4 3.2 2.1 2.0 Asset (%) GNPA 4.9 4.3 6.5 6.7 5.9 NNPA 2.6 2.1 3.8 3.6 3.0 PCR 62.9 69.1 60.7 62.4 62.4 Management (%) Credit/ Deposit 86.8 82.4 84.6 82.5 85.2 Cost/ Income 52.7 49.7 49.1 50.0 49.0 CASA 44.4 42.9 43.8 45.0 44.3 Earnings (%) NIM 3.3 3.2 3.0 2.9 2.8 ROE 10.0 10.6 7.3 7.8 9.9 ROA 0.6 0.7 0.5 0.5 0.7
Recommendation Summary (last 3 years) Dates Rating Target 400 350 300 250 200 150 01 February 2014 HOLD 159 16 April 2014 HOLD 183 20 May 2014 HOLD 243 16 February 2015 BUY 348 04 July 2015 BUY 338 18 January 2016 BUY 302 15 February 2016 BUY 256 22 August 2016 BUY 284 17 November 2016 BUY 310 100 50 0 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 Source: Bloomberg, Geojit BNP Paribas Research 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 BNP Paribas Financial Services Limited has outsourced the preparation of this research report to DION Global Solutions Limited whose relevant disclosures are available hereunder. However, Geojit BNP Paribas's research desk have 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 BNP Paribas 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. 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. INH100002771. 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 not received any 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. Geojit BNP Paribas, 34/659-P, Civil Lane Road, Padivattom, Kochi 682024. Toll Free Number: 1800-425-5501 / 1800-103-5501, Paid Number: 91 0484 3911777, Email id: customercare@geojit.com Research Entity SEBI Registration Number: INH200000345