SBI - Asset quality surprises positively - Edelweiss

State Bank of India's (SBI) Q4FY12 profit was higher than our estimates at INR40.5bn (up 24% QoQ). Key highlight is clearly the stellar performance seen on reduction in slippages to 2% after a ~4% run for 9MFY12.Fresh restructuring of INR 51bn was also in check. Other operating metrics too held up in good stead with: (1) NII only marginally below expectations due to 16bps QoQ decline in NIMs to 3.9%; and (2) other income up 11% supported by INR5.15bn of dividend from associate banks. Maintain 'HOLD' with a TP of INR 2056.

Slippages take U-turn, divergent trend vis-à-vis PSU peers

The bank surprised on asset quality with reduced slippages causing GNPA decline to 4.4% (from 4.6% QoQ). With adequate provisioning, coverage improved from 53% to 60% QoQ. Including technical write-offs, the number improved ~5% to 68%. While the restructured book added another INR51.3bn to close at INR371.7bn (outstanding) or 4.3% of advances, it is broadly in line with expectations given chunky aviation (INR12bn). Slippages from this pool stands at 16%. Recovery and upgradation run-rate was commendable at INR47.2bn (INR11bn shifted to restructuring). Also, retail segment witnessed better recoveries as organizational changes effected during early part of the year took shape. Management opines that significant asset quality deterioration is unlikely even while it is early to draw strong conclusions. It guided for net slippage of INR20bn in Q1FY13. Management has so far received restructuring request of INR 30 bn for Q1FY13. We do not expect a material reduction in slippages and are building it to trend down from 3.5% of FY12 to 3.0% in FY13 given the tough macro conditions.

Outlook & valuations: Asset quality trends key; maintain 'HOLD'

Q4FY12 was relieving, especially in comparison of the previous few quarters when healthy core NII growth was undone by lower fee income and higher NPL provisioning while slippages grew unabated at 4%. We, however, expect asset quality pressures to persist amidst weakening macro (though not as severe as FY12) and NIMs to come under pressure (as the bank takes base rate cuts). Recent capital infusion of INR80bn is likely to bring some relief. We expect RoA of 1.1% and RoEs of 16-17%. Adjusting for value of subsidiaries of INR528, standalone SBI is trading at 1.2x FY13E adj book.

Source : Equity Bulls

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