Strong operating performance January 24, 2011 Abhijit Majumder abhijitmajumder@plindia.com +91 22 66322236 Umang Shah umangshah@plindia.com +91 22 66322242 Rating Accumulate Price Rs2,597 Target Price Rs3,300 Implied Upside 27.1% Sensex 19,008 (Prices as on January 21, 2011) Trading data Market Cap. 1,649.0 Shares o/s (m) 635.0 3M Avg. Daily value (Rs m) 10838.7 Major shareholders Promoters 59.40% Foreign 13.99% Domestic Inst. 15.54% Public & Other 11.07% Stock Performance (%) 1M 6M 12M Absolute (5.4) 6.6 22.3 Relative (0.1) 0.8 10.8 Price Performance (RIC: SBI.BO, BB: SBIN IN) Strong core operating performance, asset quality remains stable: State Bank of India (SBI) reported net profit of Rs28.3bn, up 14.1% YoY and 13.1% QoQ, higher than our as well as street estimates. Key positives were 1) Robust 43.3% YoY and 11.5% QoQ NII growth driven by healthy 21.3% YoY increase in net advances, coupled with a smart 18bps QoQ improvement in the net interest margin to 3.61% (NIM has improved sequentially for the sixth consecutive quarter) 2) Growth in CASA deposits (27.7% YoY and 4.4% QoQ) outpacing the overall deposits growth (14.1% YoY and 2.8% QoQ), resulting in 38bps QoQ improvement in CASA ratio to 48.2%, which is impressive. Overall non interest income de grew by 1.5% YoY and 17.3% QoQ due to subdued fee (down 15.9% QoQ) and treasury income (down 49.6% YoY). Staff expenses include Rs1.4bn towards gratuity provision, along with Rs380m write back of excess provisions made earlier towards wage arrears. Gross NPAs remained largely stable (up 1.0% QoQ) due to lower slippages and aggressive write offs during the quarter. Consolidated PAT increased by 13.5% YoY and 61.0% QoQ to Rs38.1bn, while profits for associate banks increased by 15.0% YoY and 9.8% QoQ. Lower slippages and aggressive write offs result in stable asset quality: Reported gross slippages in Q3FY11 reduced to Rs31.5bn v/s Rs44.1bn in the previous quarter. However, the slippages have been reduced for the unrealized interest of previous years (URIPY) to the tune of ~Rs7.7bn. As a result, gross slippages for the quarter stood at ~Rs39bn, which is still lower compared to earlier quarters. Nevertheless, the net slippages stood contained at Rs2.3bn due to similar amount of up gradations. Total assets restructured during the quarter stood at ~Rs20.8bn on account of restructuring of a chunky account from the aviation sector (Rs16.0bn). Provision coverage (including technical write offs) improved to 64.1% from 62.8% in the previous quarter. Key financials ( Y/e March) 2010 2011E 2012E 2013E Net interest income (Rs m) 236,714 331,114 379,216 463,778 Growth (%) 13.4 39.9 14.5 22.3 Operating profit (Rs m) 183,209 268,353 326,835 396,832 PAT (Rs m) 91,672 110,412 147,011 184,896 EPS (Rs) 144.4 152.9 203.6 256.0 Growth (%) 0.5 5.9 33.1 25.8 Net DPS (Rs) 30.0 31.0 32.0 33.0 Q3FY11 Result Update (Rs) 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Source: Company Data; PL Research Profitability & Valuation 2010 2011E 2012E 2013E NIM (%)** 2.3 2.9 2.8 2.8 RoAE (%) 14.8 13.8 14.6 16.2 RoAA (%) 0.9 1.0 1.1 1.1 P / BV (x)* 2.3 1.8 1.5 1.3 P / ABV (x)* 2.5 1.9 1.6 1.3 PE (x)* 15.1 13.9 10.1 7.7 Net dividend yield (%) 1.2 1.2 1.2 1.3 Source: Bloomberg Source: Company Data; PL Research **Calculated on average assets *Refer Page 5 Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Valuations and Outlook: SBI continues to perform well on the core operating front, with continued strong traction seen in its low cost deposits and margins being held up quite well. Slippages are trending downwards, but still remain at elevated levels. Credit costs are likely to remain high till H1FY12, given the RBI stipulation to meet 70% provision coverage by September 2011. Although at 1.6x its FY12E ABV, the stock is attractively valued, we observe that historically, SBI s margins have eroded significantly in a rising interest rate scenario. Moreover, uncertainty over asset quality and changes at the top management could act as an overhang on the stock. Consequently, we maintain our Accumulate rating and price target on the stock. January 24, 2011 2
Q3FY11 Result Overview (Rs m) Y/e March Q3FY11 Q3FY10 YoY gr. (%) Q2FY11 9MFY11 9MFY10 YoY gr. (%) Interest Income 214,128 177,797 20.4 198,081 596,730 530,283 12.5 Interest Expense 123,630 114,634 7.8 116,932 352,047 360,783 (2.4) Net Interest Income 90,498 63,163 43.3 81,149 244,684 169,500 44.4 Non Interest Income 33,139 33,657 (1.5) 40,052 110,091 104,596 5.3 Treasury Income 2,202 4,370 (49.6) 1,973 5,863 16,912 (65.3) CEB 24,774 21,900 13.1 29,450 78,321 61,550 27.2 Net total Income 123,637 96,820 27.7 121,201 354,775 274,096 29.4 Operating Expenses 55,992 50,639 10.6 57,631 162,216 142,826 13.6 Employee 35,117 31,175 12.6 36,758 102,614 91,629 12.0 Other operating expenses 20,876 19,464 7.3 20,873 59,602 51,197 16.4 Operating profit 67,645 46,182 46.5 63,570 192,559 131,270 46.7 Core operating profits 63,363 38,460 64.8 56,055 172,983 102,201 69.3 Provisions 20,515 8,566 139.5 26,215 62,244 20,454 204.3 Loan loss provisions 16,323 5,146 217.2 21,625 55,282 29,611 86.7 Profit before tax 47,130 37,615 25.3 37,355 130,315 110,816 17.6 Tax 18,849 12,825 47.0 12,342 47,879 37,822 26.6 Net Profit after tax 28,281 24,791 14.1 25,014 82,437 72,995 12.9 Asset Quality Gross NPA's 234,378 188,612 24.3 232,046 234,378 188,612 24.3 Gross NPA's (%) 3.2 3.1 3.4 3.2 3.1 Net NPA's 116,951 112,708 3.8 116,012 116,951 112,708 3.8 Net NPA's (%) 1.6 1.9 1.7 1.6 1.9 Coverage 50.1 40.2 50.0 50.1 40.2 Capital Adequacy (%) CAR 13.2 13.8 13.2 13.2 13.8 Tier 1 9.6 9.7 9.6 9.6 9.7 NIM reported (%) 3.6 2.8 3.4 3.4 2.6 NIM calculated (%) 3.1 2.5 3.0 2.9 2.2 Balance Sheet Items Deposits 8,789,790 7,709,850 14.0 8,553,450 8,789,790 7,709,850 14.0 CASA 3,937,910 3,083,570 27.7 3,771,400 3,937,910 3,083,570 27.7 CASA Ratio (%) 48.2 42.9 47.8 48.2 42.9 Advances 7,266,490 5,989,180 21.3 6,807,490 7,266,490 5,989,180 21.3 January 24, 2011 3
Net advances grew by 21.3% YoY and 6.7% QoQ. Deposits growth remained calibrated as they grew by 14.0% YoY and 2.8% QoQ. Notably, CASA deposits continued to grow at a rapid pace by 27.7% YoY and 4.4% QoQ, leading to 38bps QoQ improvement in CASA ratio to 48.2%. Trend in business growth 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Non CASA deposits Advances Growth (RHS) CASA deposits Deposits Growth (RHS) 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Trend in net interest margins NIM continued to improve for the sixth consecutive quarter as it increased by 18bps QoQ to 3.61%. Improvement in margins could be explained through a 13bps QoQ decline in the cost of deposits due to strong increase in CASA deposits. Moreover, the recent PLR hikes resulted in a marginal 4bps QoQ improvement in the yield on advances, which too aided margin expansion. 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% Cost of deposits Yield on advances NIMs (RHS) 3.8% 3.6% 3.4% 3.2% 2.8% 2.6% 2.4% 2.2% 2.0% Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 GNPAs increased marginally by 1.0% QoQ, on the back of lower net slippages during the quarter. Provision coverage, although remained stable QoQ at 50.0%, including technically written off accounts, it stood at 64.07% v/s 62.78% in the previous quarter. Trend in Q o Q change in NPAs 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 5.0 10.0 15.0 Incr. GNPA Incr. NNPA NNPA % (RHS) GNPA % (RHS) 3.5% 2.5% 2.0% 1.5% 1.0% 0.5% Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 January 24, 2011 4
Gross slippages during the quarter declined sharply to Rs31.5bn (2.1% annualized) v/s Rs44.1bn last quarter. However, adjusting for unrealised interest of the previous years (which has been set off against gross slippages), the slippages stood at ~Rs39bn (2.6% annualized). Moreover, slippages from the restructured portfolio during the quarter stood at Rs6.4bn, cumulative slippages stood at Rs28.9bn, 15.7% of the restructured portfolio. Trend in slippages based on previous years closing advances 200 180 160 140 120 100 80 60 40 20 0 Source: PL Research, Company Data Gross Slippages (Annualized) 2.8% 2.1% 1.9% Slippages (%) (RHS) 3.1% 2.1% Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 3.5% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Quarterly movement in NPAs During the quarter, SBI reversed the unrealized interest of previous years (URIPY) to individual borrower s accounts. This has resulted into lower gross slippages to the tune of Rs7.7bn. Adjusting for the same, the gross slippages for the quarter stand at ~Rs39bn. However, similar amount has also been adjusted among up gradations, as a result of which the net slippages during the quarter remains unchanged. Movement in NPAs Q1FY11 Q2FY11 Q3FY11 Movement in NPAs Q1FY11 Q2FY11 Q3FY11 Opening GNPAs 195.4 208.3 232.1 Opening GNPAs 195.4 208.3 232.1 Fresh Slippages 40.8 *52.7 31.5 Fresh Slippages 40.8 *52.7 39.2 Upgradation + Recoveries 21.6 20.9 14.3 Upgradation + Recoveries 21.6 20.9 22.0 Write offs 6.3 8.0 14.9 Write offs 6.3 8.0 14.9 Closing NPAs 208.3 232.1 234.4 Closing NPAs 208.3 232.1 234.4 *Includes slippages worth Rs8.5bn from SBIn portfolio SOTP Valuation Business Basis Multiple Value/Share (FY12E) % of SOTP Multiple Value/Share (FY13E) % of SOTP Standalone Core Banking x ABV** 1.8 2,408 81.9% 1.8 2,799 81.7% SBI (associate banks) x ABV 1.1 280 9.5% 1.1 322 9.4% SBI life Appraisal Value 176 6.0% 218 6.4% SBI Mutual Fund % of AUM 5.0% 15 0.5% 5.0% 16 0.5% SBI Capital Market x PAT 12.0 25 0.9% 12.0 32 0.9% Other investments (UTI MF, NSE etc.) 36 1.2% 39 1.1% Total 2,940 100.0% 3,426 100.0% 12 month forward price target based on 25% of FY12E & 75% of FY13E price targets above ** Rs106 and Rs120 per share reduced for investment in subsidiaries from Book Value & Rs532 & Rs627 per share reduced from the CMP for value of subsidiary for FY12 and FY13 respectively. We have also applied a 15% holding company discount. January 24, 2011 5
Income Statement (Rs m) Int. Earned from Adv. 506,326 596,493 755,261 913,016 Int. Earned from Invt. 177,363 212,843 251,465 290,272 Others 26,250 17,355 26,271 31,558 Total Interest Income 709,939 826,691 1,032,997 1,234,846 Interest expense 473,225 495,577 653,781 771,068 NII 236,714 331,114 379,216 463,778 Growth (%) 13.4 39.9 14.5 22.3 Treasury Income 21,168 7,500 9,000 9,000 NTNII 128,514 152,759 188,638 225,048 Non Interest Income 149,682 160,259 197,638 234,048 Total Income 859,621 986,950 1,230,635 1,468,894 Growth (%) 12.4 14.8 24.7 19.4 Operating Expense 203,187 223,020 250,019 300,994 Operating Profit 183,209 268,353 326,835 396,832 Growth (%) 2.3 46.5 21.8 21.4 Total Provisions 43,948 93,095 107,415 120,868 PBT 139,261 175,257 219,420 275,964 Tax Provisions 47,589 64,845 72,408 91,068 Effective Tax Rate (%) 34.2 37.0 33.0 33.0 PAT 91,672 110,412 147,011 184,896 Growth (%) 0.5 20.4 33.1 25.8 Balance Sheet (Rs m) Par Value 10 10 10 10 No. of equity shares 635 722 722 722 Equity 6,350 7,221 7,221 7,221 Networth 659,493 944,741 1,065,775 1,223,883 Adj. Networth 550,792 831,878 971,291 1,136,442 Deposits 8,041,162 9,247,337 11,096,804 13,316,165 Growth (%) 8.4 15.0 20.0 20.0 Low Cost deposits 3,800,397 4,253,775 4,882,594 6,125,436 % of total deposits 47.3 46.0 44.0 46.0 Total Liabilities 10,539,563 12,438,438 14,927,061 17,945,733 Net Advances 6,319,141 7,553,983 9,271,286 11,454,794 Growth (%) 16.5 19.5 22.7 23.6 Investments 2,857,901 3,236,568 3,661,945 4,128,011 Total Assets 10,539,564 12,438,438 14,927,061 17,945,733. Quarterly Financials (Rs m) Y/e March Q4FY10 Q1FY11 Q2FY11 Q3FY11 Interest Income 179,656 184,521 198,081 214,128 Interest Expense 112,442 111,484 116,932 123,630 Net Interest Income 67,214 73,037 81,149 90,498 Non Interest Income 45,085 36,900 40,052 33,139 CEB 34,858 24,096 29,450 24,774 Treasury 4,256 1,734 1,973 2,202 Net Total Income 112,300 109,937 121,201 123,637 Operating Expenses 60,361 48,593 57,631 55,992 Employee Expenses 35,918 30,739 36,758 35,117 Other Expenses 24,443 17,854 20,873 20,876 Operating Profit 51,939 61,344 63,570 67,645 Core Operating Profit 47,683 59,610 61,597 65,443 Provisions 23,494 15,514 26,215 20,515 Loan loss provisions 21,868 17,334 21,625 16,323 Investment Depreciation 356 (2,983) 4,318 2,088 Profit before tax 28,445 45,830 37,355 47,130 Tax 9,779 16,688 12,342 18,849 PAT before EO 18,666 29,142 25,014 28,281 Extraordinary item PAT 18,666 29,142 25,014 28,281 Key Ratios CMP (Rs) 2,597 2,597 2,597 2,597 Equity Shrs. Os. (m) 635 722 722 722 Market Cap (Rs m) 1,649,032 1,875,341 1,875,341 1,875,341 M/Cap to AUM (%) 15.6 15.1 12.6 10.5 EPS (Rs) 144.4 152.9 203.6 256.0 Book Value (Rs) 1,039 1,308 1,476 1,695 Adj. BV (75%) (Rs) 944 1,233 1,427 1,655 P/E (x) 15.1 13.9 10.1 7.7 P/BV (x) 2.3 1.8 1.5 1.3 P/ABV (x) 2.5 1.9 1.6 1.3 DPS (Rs) 30.0 31.0 32.0 33.0 Dividend Yield (%) 1.2 1.2 1.2 1.3 Profitability (%) NIM 2.3 2.9 2.8 2.8 RoAA 0.9 1.0 1.1 1.1 RoAE 14.8 13.8 14.6 16.2 Efficiency Cost Income Ratio (%) 52.6 45.4 43.3 43.1 C D Ratio (%) 78.6 81.7 83.5 86.0 Business per Emp. (Rs m) 72 74 83 91 Profit per Emp. (Rs m) 5 5 6 7 Business per Branch (Rs m) 1,149 1,292 1,487 1,720 Profit per Branch (Rs m) 7 8 11 13 Asset Quality Gross NPAs (Rs m) 195,349 235,130 236,211 291,471 Net NPAs (Rs m) 108,702 112,862 94,484 87,441 Gr. NPAs to Gross Adv. (%) 3.0 3.1 2.5 2.5 Net NPAs to Net Adv. (%) 1.7 1.5 1.0 0.8 NPA Coverage (%) 44.4 52.0 60.0 70.0. January 24, 2011 6
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai 400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage % of Total Coverage 60% 50% 40% 30% 20% 10% 0% 53.8% 30.3% 13.6% 2.3% Buy Accumulate Reduce Sell PL s Recommendation Nomenclature BUY : Over 15% Outperformance to Sensex over 12 months Accumulate : Outperformance to Sensex over 12 months Reduce : Underperformance to Sensex over 12 months Sell : Over 15% underperformance to Sensex over 12 months Trading Buy : Over 10% absolute upside in 1 month Trading Sell : Over 10% absolute decline in 1 month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. We may from time to time solicit or perform investment banking or other services for any company mentioned in this document. For Clients / Recipients in United States of America: All materials are furnished courtesy of Direct Access Partners LLC ("DAP") and produced by Prabhudas Lilladher Pvt. Ltd. ("PLI"). This material is for informational purposes only and provided to Qualified and Accredited Investors. You are under no obligation to DAP or PLI for the information provided herein unless agreed to by all of the parties. Additionally, you are prohibited from using the information for any reason or purpose outside its intended use. Any questions should be directed to Gerard Visci at DAP at 212.850.8888. January 24, 2011 7