1QFY18 Result Update Institutional Equities State Bank of India 14 August 2017 Reuters: SBI.BO; Bloomberg: SBIN IN Merger With Associate Banks Accentuates The Pain State Bank of India s (SBI) annualised loan slippage ratio in 1QFY18 stood at 6.7% (Rs301bn), far above our estimate as well as street estimate. Loan slippage remained elevated as the bank was unable to monitor non-corporate (SME/agriculture/retail) loan accounts properly during the merger process, resulting in higher slippage of Rs179bn from this segment. Of the corporate segment slippage of Rs84bn, 95% of it was from the watch list. As a result, watch list eased to Rs244bn (1.4% of loan book) with 43% of the watch list pertaining to the power sector. On the back of higher write-off (Rs102bn) and recoveries (Rs67bn), gross non-performing asset or GNPA deterioration was limited by 86bps sequentially to 10%. Provision coverage ratio fell 74bps sequentially to 60.8%. The management has given guidance that non-corporate slippage will be contained within Rs300bn and recoveries at Rs168bn for FY18. Net interest income or NII declined 4% because of subdued loan disbursal and higher interest reversal on slippage. With lower focus on credit during the merger process, loan growth was miniscule at 1%. Net interest margin or NIM fell 48bps YoY to 2.4%. While there was no pick-up in corporate and SME segment credit off-take, retail segment grew relatively well at 13%. Non-interest income fell 9%, as the year-ago period includes oneoff gain from sale of stake in National Stock Exchange or NSE. Fee income grew 16%. Our current estimates are not comparable with earlier estimates as they now include associate banks numbers. We have retained our Buy rating on SBI with a target price of Rs325 (Rs355 earlier), valuing the parent at 1.4x P/ABV FY18E financials and Rs65 for subsidiaries. Valuation and outlook: Loan slippage was higher during the quarter, but the management gave guidance that it will come down significantly in subsequent quarters. SBI s assets under the watch list in the corporate segment are at a comfortable level. We also derive comfort from SBI s adequate capital cushion (Tier-I capital of 10.7%) which can rise after further disinvestment of non-core investments and the sale of stake in its life insurance subsidiary, unparalleled deposit franchise (domestic CASA deposit ratio at 42%) and incremental loans being more to A and above-rated entities. Extension of the tenure of Ms. Arundathi Bhattacharya, the current chairman, adds to the continuity, especially driving synergies from the merger of associate banks with SBI. SBI has the lowest restructured assets compared to peers. We believe SBI, being a proxy to the economy, is likely to be a major beneficiary of the economic recovery leading to lower credit costs, improvement in profitability and higher return ratios in the medium term. We are participating in AsiaMoney s Brokers Poll 2017. We would be pleased if you vote for us as the feedback helps us align our equity research offerings to meet your requirements. Click Here BUY Sector: Banking CMP: Rs280 Target Price: Rs325 Upside: 16% Hatim Broachwala, CFA Research Analyst hatim.broachwala@nirmalbang.com +91-22-3926 8068 Key Data Current Shares O/S (mn) 8,632.1 Mkt Cap (Rsbn/US$bn) 2,422.6/37.8 52 Wk H / L (Rs) 315/224 Daily Vol. (3M NSE Avg.) 15,661,150 Price Performance (%) 1 M 6 M 1 Yr SBI (1.0) 1.6 23.6 Nifty Index (0.8) 10.4 13.0 Source: Bloomberg and Y/E March (Rsmn) 1QFY18 1QFY17 4QFY17 YoY (%) QoQ (%) Interest income 5,49,054 5,44,930 5,89,690 0.8 (6.9) Interest expenses 3,72,994 3,62,480 3,79,030 2.9 (1.6) Net interest income 1,76,060 1,82,450 2,10,660 (3.5) (16.4) NIM (%) 2.4 2.8 2.7 (48bps) (38bps) Non-interest income 80,057 87,610 1,22,220 (8.6) (34.5) Operating income 2,56,117 2,70,060 3,32,880 (5.2) (23.1) Staff costs 77,245 77,820 89,140 (0.7) (13.3) Other operating expenses 60,131 54,620 70,640 10.1 (14.9) Total operating expenses 1,37,376 1,32,440 1,59,780 3.7 (14.0) Cost to income (%) 53.6 49.0 48.0 460bps 564bps Operating profit 1,18,741 1,37,620 1,73,100 (13.7) (31.4) Provisions 89,295 1,30,370 2,09,320 (31.5) (57.3) PBT 29,446 7,250 (36,220) 306.2 (181.3) Tax 9,391 3,510 (1,810) 167.5 (618.8) -Effective tax rate (%) 31.9 48.4 5.0 (1,652bps) 2,690bps Net profit 20,055 3,740 (34,410) 436.2 (158.3) EPS (Rs) 2.3 0.5 (4.3) 390.8 (153.8) BV (Rs) 265.3 265.1 265.9 0.1 (0.2) Deposits 2,60,25,342 2,29,74,260 2,58,53,200 13.3 0.7 Advances 1,80,42,189 1,79,57,850 1,95,25,070 0.5 (7.6)
Institutional Equities Exhibit 1: Financial summary Y/E March (Rsmn) FY15 FY16 FY17 FY18E FY19E Net interest income 5,50,153 5,71,948 6,18,597 7,27,311 8,53,798 Pre-provision profit 3,89,135 4,32,578 5,08,479 5,51,744 6,38,208 PAT 1,31,016 99,507 1,04,841 1,40,064 1,90,079 EPS (Rs) 17.5 12.8 13.1 16.2 22.0 ABV (Rs) 135.1 114.0 163.1 168.1 195.5 P/E (x) 12.3 16.8 16.4 13.2 9.8 P/ABV (x) 1.7 2.0 1.4 1.3 1.1 Gross NPAs (%) 4.4 6.7 7.2 8.9 8.4 Net NPAs (%) 2.1 3.8 3.7 4.6 3.8 RoA (%) 0.7 0.5 0.4 0.6 0.6 RoE (%) 10.6 7.3 6.3 6.5 7.7 1QFY18 analyst meet highlights The merger of associate banks with SBI has been complete seamlessly, but in the process SBI inherited some stressed assets from its associate banks. Rationalisation of branches (linking of accounts, allocating new account numbers, etc) and employees (training, transfer, reassignment, etc) has been completed. Loan slippage was elevated as the bank was unable to monitor retail loan accounts properly during the merger process, but the bank is positive on pulling back the slippage. ~Rs84bn slipped from corporate accounts, of which Rs4.8bn was from large corporates, specifically a large conglomerate, while Rs3.1bn slipped from mid-sized corporate accounts. 95% of corporate loan slippage was from the watch list. As regards the retail segment, slippage stood at Rs179bn which can be attributed to the following: Only accounts over Rs500mn were monitored and those below Rs500mn led to slippage. Forbearance during the demonetisation period came to an end, which contributed ~Rs20bn to slippage. Slippage from circles where farm/education loan waivers were announced also led to increased stress. However, the bank expects ~Rs30bn to flow from the respective state governments and will thus reduce this number. During the merger process, SBI officials could not follow up with the customers and hence led to nonpayment of dues. Technical glitches in importing ECH and standing instructions from associate banks also led to higher slippage. Segment-wise break-up of retail slippage is as follows: SME 35% Agriculture 40% Housing 14% Personal loan and others 11% 7% of slippage was from restructured accounts. Out of the 12 accounts identified under the Insolvency and Bankruptcy Code, SBI has an exposure of Rs500bn on which the bank already holds ~Rs199bn as provision and will provide an additional Rs86bn during the year. The bank is confident of recovering slipped loans in the coming quarters. There was a deposit-advance mismatch post merger of ~Rs260bn. The management justified this mismatch as follows: 2 State Bank of India
Feb-07 Aug-07 Jan-08 Jun-08 Nov-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jul-11 Dec-11 May-12 Oct-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 Jun-15 Nov-15 Apr-16 Sep-16 Mar-17 Aug-17 Institutional Equities The excess deposits have been deployed in treasuries for the time being. During the merger process, the bank was unwilling to lend aggressively to the corporate sector. The bank is unwilling to deploy assets in stressed asset circles. Rationalisation of branches and employees is expected to be completed by September 2017. 8,000 employees are expected to be redeployed by December 2017 and assigned new KRAs. The bank has completed payment of ex-gratia which should result in savings of ~Rs4bn per year. Interest income grew only 0.8% YoY as there was a reduction in the base rate and MCLR. Non-interest income witnessed one-time hit of Rs9,070mn. It was also lower on account of switch from AFS to HTM in treasuries. NIM should recover by 10bps-15bps as slippage is contained and interest rates come down. SBI gained 300bps market share in automobile loans. GNPAs were up 6bps YoY at 9.97% which can be attributed to the denominator effect and inheritance from associate banks. Provision coverage ratio or PCR was down at 60%, but the management is confident about raising PCR in the coming quarters. Credit costs stood at 2.48% for the quarter. The management gave guidance of 2.25% for the full year. Exhibit 2: One-year forward P/ABV (adjusting for subsidiaries) (x) 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 - P/AdjBVPS Mean +1 SD -1 SD 3 State Bank of India
Institutional Equities Financial statements Exhibit 3: Income statement Y/E March (Rsmn) FY15 FY16 FY17 FY18E FY19E Interest Income 15,23,971 16,39,983 17,55,182 22,47,417 24,48,670 Interest expense 9,73,818 10,68,035 11,36,585 15,20,106 15,94,873 Net interest income 5,50,153 5,71,948 6,18,597 7,27,311 8,53,798 Fees 1,31,728 1,44,160 1,62,766 2,20,824 2,40,485 Other Income 94,031 1,34,294 1,91,843 1,96,703 2,08,869 Net Revenue 7,75,912 8,50,402 9,73,206 11,44,839 13,03,153 Operating Expense 3,86,777 4,17,824 4,64,728 5,93,095 6,64,945 -Employee Exp 2,35,371 2,51,138 2,64,893 3,65,997 4,02,597 -Other Exp 1,51,406 1,66,686 1,99,835 2,27,098 2,62,348 Pre-provision Profit 3,89,135 4,32,578 5,08,479 5,51,744 6,38,208 Provisions 1,95,996 2,94,836 3,59,927 3,39,526 3,50,210 -Loan Loss Provisions 1,68,636 2,98,808 3,29,056 2,90,685 3,27,935 -Investment Depreciation (5,901) 1,495 2,984 - - -Other Provisions 33,261 (5,467) 27,887 48,841 22,275 PBT 1,93,139 1,37,742 1,48,552 2,12,218 2,87,998 Taxes 62,123 38,235 43,711 72,154 97,919 PAT 1,31,016 99,507 1,04,841 1,40,064 1,90,079 Exhibit 5: Balance sheet Y/E March (Rsmn) FY15 FY16 FY17 FY18E FY19E Equity capital 7,466 7,763 7,973 8,632 8,632 Reserves & surplus 12,76,916 14,34,981 18,74,887 23,91,470 25,56,732 Shareholders funds 12,84,382 14,42,744 18,82,860 24,00,102 25,65,364 Deposits 1,57,67,933 1,73,07,225 2,04,47,514 2,85,55,687 3,16,49,411 -Current deposits 12,45,723 13,98,070 15,24,211 21,41,677 23,73,706 -Saving deposits 52,73,328 59,77,461 75,89,614 99,94,491 1,17,10,282 -Term deposit 92,48,882 99,31,693 1,13,33,689 1,64,19,520 1,75,65,423 Borrowings 20,51,503 32,33,445 31,76,937 25,69,644 28,83,125 Other liabilities 13,76,980 15,92,761 15,52,352 18,06,613 19,13,787 Total liabilities 2,04,80,798 2,35,76,174 2,70,59,662 3,53,32,046 3,90,11,687 Cash/Equivalent 17,48,613 16,74,676 17,19,716 23,71,855 26,56,477 Advances 1,30,00,264 1,46,37,004 1,57,10,780 2,06,24,825 2,30,99,804 Investments 49,50,274 57,56,517 76,59,896 1,00,95,449 1,07,91,497 Fixed Assets 93,292 1,03,893 4,29,190 5,15,028 5,66,531 Other assets 6,88,355 14,04,084 15,40,080 17,24,890 18,97,379 Total assets 2,04,80,798 2,35,76,174 2,70,59,662 3,53,32,046 3,90,11,687 Note: Numbers for FY15-FY17 are not adjusted for associate cos. Exhibit 4: Key ratios Y/E March FY15 FY16 FY17 FY18E FY19E Growth (%) NII growth 11.6 4.0 8.2 N.A. 17.4 Pre-provision profit growth 21.2 11.2 17.5 N.A. 15.7 PAT growth 20.3 (24.0) 5.4 N.A. 35.7 Business (%) Deposits growth 13.1 9.8 18.1 N.A. 10.8 Advances growth 7.5 12.6 7.3 N.A. 12.0 Business growth 10.5 11.0 13.2 N.A. 11.3 Credit deposit 82.4 84.6 76.8 72.2 73.0 CASA deposit 41.3 42.6 44.6 42.5 44.5 Operating efficiency (%) Cost-to-income 49.8 49.1 47.8 51.8 51.0 Cost-to-assets 2.0 1.9 1.8 1.9 1.8 Productivity (Rsmn) Business per branch 1,761.4 1,903.3 1,987.3 2,047.7 2,279.6 Business per employee 134.9 153.8 172.5 178.3 198.5 Profit per branch 8.0 5.9 5.8 5.8 7.9 Profit per employee 0.6 0.5 0.5 0.5 0.7 Spread (%) Yield on advances 9.0 8.4 7.9 7.4 7.4 Yield on investments 8.3 7.9 7.2 7.2 7.2 Cost of deposits 6.0 6.0 5.6 5.3 5.1 Yield on assets 8.6 8.2 7.7 8.0 7.3 Cost of funds 5.8 5.6 5.1 5.1 4.9 NIM 3.1 2.9 2.7 2.5 2.5 Capital adequacy (%) Tier I 9.6 9.9 10.4 10.7 10.2 Tier II 2.4 3.2 2.8 1.9 1.9 Total CAR 12.0 13.1 13.1 12.6 12.1 Asset quality (%) Gross NPAs 4.4 6.7 7.2 8.9 8.4 Net NPAs 2.1 3.8 3.7 4.6 3.8 Provision coverage 52.0 43.2 48.1 48.4 54.8 Provision coverage (incl. write-off) 69.4 60.7 65.9 62.4 67.5 Slippage 2.3 4.6 2.6 2.8 2.0 Credit costs 1.5 2.3 2.3 1.9 1.6 Return (%) RoE 10.6 7.3 6.3 6.5 7.7 RoA 0.7 0.5 0.4 0.4 0.5 RoRWA 1.1 0.8 0.7 0.8 0.9 Per share EPS 17.5 12.8 13.1 16.2 22.0 BV 172.0 185.8 236.2 278.1 297.2 ABV 135.1 114.0 163.1 168.1 195.5 Valuation (x) P/E 12.3 16.8 16.4 13.2 9.8 P/BV 1.3 1.2 0.9 0.8 0.7 P/ABV 1.7 2.0 1.4 1.3 1.1 4 State Bank of India
Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Institutional Equities Rating track Date Rating Market price (Rs) Target price (Rs) 14 August 2014 Buy 2,418 2,915 8 October 2014 Buy 2,411 2,915 17 November 2014 Buy 2,785 3,200 22 December 2014 Buy 304 363 8 January 2015 Buy 301 363 16 February 2015 Buy 308 375 25 May 2015 Buy 282 375 12 August 2015 Buy 268 375 9 November 2015 Buy 244 375 12 February 2016 Buy 155 220 30 May 2016 Buy 201 240 16 August 2016 Buy 244 280 15 November 2016 Buy 272 315 13 February 2017 Buy 275 315 14 February 2017 Buy 272 335 22 May 2017 Buy 309 355 14 August 2017 Buy 280 325 Rating track graph 350 300 250 200 150 100 Not Covered Covered 5 State Bank of India
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