SBI - Nirmal Bang

Healthy performance but remain cautious

State Bank of India (SBI) reported net earnings of Rs40.5bn for 4QFY12 and Rs117bn for FY12, higher by 15% and 6.6% from our QoQ estimate of Rs35.2bn and YoY estimate of Rs110bn, aided by healthy operating performance. Post results, the stock surged 5% as street expectations were exceeded. However, we remain cautious as we believe the current uncertain macro-economic environment coupled with weak demand would result in sustained stress on asset quality and profitability and the asset quality concerns would soon resurface after the muted current quarter. We are maintaining our sell rating and rolling forward our target multiple of 1.3x to FY13 with a target price of Rs1,786 from Rs1,520 (based on 1.3x FY12BV), down 8% from the current market price.

Operational performance: SBI reported healthy 4QFY12 earnings backed by YoY growth of 43.8% in net interest income (NII), ahead of our net profit estimate for 4QFY12 by 15% and Bloomberg consensus estimate by 12.9%. It reported interest income growth of 31.6% YoY and 3.3% QoQ, while interest costs grew 24.4% YoY and 4.9% sequentially to fuel NII growth of 43.8% YoY and 1.1% QoQ at Rs115,910mn. Reported NII shows a deviation of -4.2% against our estimate of Rs120,985mn. SBI reported growth of 11.7% YoY and 153% sequentially in non-interest income aided by dividend income and forex gains however, the growth was capped by losses on its equity portfolio and foreign operations. Overheads for the quarter increased 8.5% YoY and 16.4% QoQ at Rs73,710mn, driven by increase of 12.4% and 6.5% YoY, respectively, in operating overheads and staff expenses. Profit before provisioning stood at Rs95,968mn against our estimate of Rs82,801mn, a growth of 57.9% YoY and 32.2% sequentially. For the 4QFY12, SBI reported decline of 13.1% YoY and sequential decline of 5.6% in loan loss provisioning at Rs28,368mn against our estimate of Rs31,090mn. Profit after tax clocked a growth of 24.1% QoQ at Rs40,503mn against our estimate of Rs35,212mn. The deviation stems from lower loan loss provisioning.

Net interest margin improves: SBI reported improvement by 82bps in net interest margin (NIM) YoY at 3.89% for the quarter as against 3.07% in 4QFY11. NIM improvement came on the back of a 149bps hike in the average yield on loans, which stood at 11.05% as compared to 9.56% in 4QFY11, while average cost of funds rose 76bps to 6.15% from 5.39% in 4QFY11. We expect NIM to settle around 3.3% over FY13-14E.

Valuation and outlook: It is suprising that SBI reported a "blockbuster", highest ever net earning quarter in a period when economic macro indicators were rapidily deteriorating. Going ahead, we feel the headwinds for the global economy persists and its repercussions could be felt in emerging markets, in the form of slower growth. Also, with headline inflation hovering well above the regulators comfort zone, the Reserve Bank of India (RBI) has little headroom for more rate cuts, which would further dampen investments outlook and suggests sustained stress over the bank's asset quality. We reiterate that fragile global environment coupled with decelerating demand outlook would continue to arrest loan book growth for domestic banks and focus remains on the quality of the assets as the risk of loan default rises considerably.

We are rolling forward our target multiple of 1.3x on FY13E BV of Rs1,374 from FY12E BV of Rs1,169 with a target price of Rs1,786, downside of 8% from the current levels, retaining our Sell rating on SBI. At the CMP, the stock trades at 1.4x FY13E book value.

Source : Equity Bulls

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