SBI - Disappointing performance - Centrum

Not withstanding marginal beat at bottomline, SBI's Q1FY13 performance was disappointing due to worsening asset quality matrix - essentially reversing the improvement achieved in Q4FY12. Cautious management commentary, overhang of high GNPA, incremental restructuring and potential adverse impact of monsoon failure should lead to underperformance in the near term. We downgrade the stock to Neutral given limited upside to our revised target price of Rs2100.

Asset quality: Q4 improvement reversed: Asset quality matrices sprung a materially negative surprise with: 1) GNPA up 19% QoQ to 5% - highest in industry 2) slippage rate spiked to 5% 3) PCR eroded by ~400bps to 64% and 4) credit costs sustaining at a high 1.2%. Meanwhile, the cumulative restructured portfolio was largely stable at ~4% loans while cumulative slippages from the pool stood at 20%. While the restructured portfolio remained lower than of PSB peers (8-9% of loans), the stress assets (GNPA + restructured) was comparable. Management commentary on near term asset quality trends makes us cautious on incremental restructuring and slippage trends. Moreover, the worsening outlook for the agriculture sector only adds to the already heightened asset quality concerns.

NIM contracts QoQ: NII grew by a strong 15% YoY to Rs111bn (vs our estimate of Rs115bn). Sequentially, NIM witnessed contraction on lower loan yields and rising funding costs while advances growth stood at 20% YoY. On the margin front, we are building in contraction of 25bps during FY13 led by recent lending rate cuts and potential risk to pricing power in a weak credit demand environment.

Loan growth at 20%: Led by strong growth in agri (26% YoY) and international book (benefit of rupee depreciation) overall loan book growth improved to 20% (vs 15% last quarter). Meanwhile, mid-corporate and SME segments lagged materially led by cautious stance adopted by the management. Capital position is healthy with Tier I at 9.4% & CAR at 13.2%.

MTM write-back supports bottom-line: The provisions came in lower than expected at Rs 24.6bn (down 22% QoQ) as the bank benefitted from MTM write-back of Rs5.2bn while NPA provisions were flat QoQ. Importantly, the PCR eroded by 400bps even as the management claimed to have made an extra provision of Rs7bn during the quarter. We have factored in sustained stiff credit costs (~140bps) for FY13 and FY14.

Downgrade to Neutral: We have tweaked our earnings estimates to factor in additional information. With Q1FY13 performance reversing the improvement achieved on asset quality front in the previous quarter as well as management's cautious commentary on near term outlook, our concerns on asset quality remains. Moreover, the weaker monsoon so far only adds to asset quality risks for the bank. Given these aspects, we expect the stock to underperform in the near term. At current market price, the stock trades at 1.5x FY14 ABVPS, 7.8x FY14E EPS and implies an upside of ~10% to our revised fair value estimate of Rs2,100. We downgrade the stock to Neutral.

Source : Equity Bulls

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