State Bank of India - Q4FY12 Result update - Centrum

Positive asset quality surprise

SBI's bottomline performance was well ahead of our (and street) estimates (PAT at Rs40.5bn vs Rs37.6bn) led by positive surprise on non-interest income and opex. The highlight of the quarter was management delivering on its promise of improving asset quality matrices: GNPA down 17bps QoQ to 4.4%, slippages down to Rs44bn vs run-rate of Rs80bn in last two quarters and strong upgrades & recoveries. While the improvement in asset quality matrices is encouraging, the tough operating environment should still keep the credit costs stiff. We upgrade the stock to Buy on attractive valuations.

- Asset quality matrices improve: Asset quality matrices sprung a positive surprise and showed signs of improvement during the quarter: 1) GNPA improved by ~17 bps QoQ to 4.44% 2) Slippage rate normalized to ~2% from +4% in last two quarters 3) upgrades & recoveries showed strength 4) PCR improved materially to 68% and 5) credit costs sustained at a high 1.5%. Meanwhile, the cumulative restructured portfolio increased by 14% QoQ (to 4.9%) while cumulative slippages from the pool was stable at ~26%. With this, the management has delivered on its guidance to improve asset quality matrices by focussing on resolving assets (especially on the retail front) by deployment of personnel and intense monitoring.

- NII inline: NII grew by a strong 45% YoY to Rs117bn (vs our estimate of Rs115bn). Sequentially, NIM witnessed a contraction of ~15bps on lower investment yields while advances growth stood at ~15% YoY. On margin front, we are building in contraction of bps during FY13 led by recent lending rate cuts and potential risk to pricing power in a weak credit demand environment.

Loan growth @ 15%: Led by strong growth in agri (23% YoY) and international book (benefit of rupee depreciation) overall loan book growth improved marginally to 15% (vs 14.4% last quarter). The management aims at a higher credit growth (16-18%) for FY13 as it believes that asset quality deterioration has peaked and capital position has been strengthened. Current capital position remains healthy with Tier I at 9.8% and CAR at 13.86%.

- Non-interest income and opex surprises positively: Non-interest income surprised positively with a sharp ~150% jump QoQ led by seasonal factors as well as typical chunkiness experienced in Q4. The surprise can be traced to handsome forex income (up 36% YoY) and substantial dividend income (Rs5.2bn) during the quarter. Opex too surprised positively led by a 20% decline in other operating expenses on a sequential basis.

- Upgrade to Buy on valuations: We have tweaked our earnings estimates to factor in additional information. While the improvement in asset quality matrices during Q4FY12 is encouraging, the tough operating environment currently and challenges to economic recovery should still keep the credit costs stiff. Post our earnings revision and roll-over of valuation to FY14E, we raise our target price to Rs2,450 (based on 1.3x FY14E Adj. BVPS for the standalone banking business along with Rs386/share for value of associate banks and Rs257/share for non-banking businesses). We had downgraded the stock to hold on limited upside; however given the correction in recent months and upward revision in target price, we are upgrading the stock to Buy. At current market price, the stock trades at 1.2x FY14 BVPS, 8x FY14E EPS and implies an upside of ~22% to our fair value estimate of Rs2,450.

Source : Equity Bulls

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