SBI - Meeting Update - Centrum

We met Mrs. Rita G. (Head, Investor relations) of SBI to take stock of the bank's performance and incremental trends experienced since Q2FY13 results.

- Asset quality challenges to remain: The bank's management expected incremental slippages to come down during H2FY13, though restructuring was likely to remain high. Collectively, the management expected slippages and restructuring to keep provisioning cost in H2FY13 the same as in H1FY13 (Total provisions of Rs43bn and Loan loss provisions of Rs46bn). In specifics, the guidance implied total provisions of ~Rs100bn for FY13 (compared with our estimate of ~Rs125bn). Overall, the management has taken various steps to rein in asset quality deterioration including 1) mandatory use of CIBIL for retail products 2) avoiding incremental exposure to certain segments 3) preference for secured credit incrementally and 4) tighter supervision of NPAs and asset quality.

- Excess liquidity on decline: The tight liquidity situation currently (due to festive credit demand) augurs well for the deployment of excess liquidity SBI has been holding (~Rs700bn at end of Q2FY13). This, despite very competitive lending rates in the retail segment, should help in keeping NIMs stable during H2FY13. From a credit growth perspective, capex-related demand is yet to revive meaningfully and hence the bank continues with its focus on secured retail loans (home and auto). Our credit growth estimate stands at 16.1% for FY2013 and 16.3% in FY2014.

- Capital Raising on cards: The bank reiterated that the government was committed to keep SBI well capitalized and would infuse capital whenever required. For FY13, the bank expected infusion of ~Rs 40 bn, for which it was evaluating various options.

- Preparing for wage hike: All PSBs will begin their wage hike negotiations with IBA and employee unions in quarters to come. With a view to smoothen the financial impact of the wage hike, SBI intends to start providing for it from Q3FY13 itself (as indicated by other PSBs as well). Over the next 12-15 months, SBI expects ~7% of its current staff to retire to be replaced by relatively lower cost employees.

- FY13 bottomline at Rs15bn: In the context of broad guidance on NIMs, loan growth and asset quality, the management expected FY13 bottomline at Rs15bn (compared with our estimate of Rs14.9bn).

- Remain Neutral: Recently, PSB stocks rallied and are now well above our stress case values. While valuations still expensive, fundamentals are yet to catch up to the improved sentiments post reform announcements and hence this will cap further upside. We expect the recovery in economic activity to be quite gradual and hence the initial signs of stress bottoming out could be a couple of quarters ahead. SBI remains better placed than peers in its ability to navigate through asset quality deterioration given that significant pain has already been experienced (high GNPA and lowest level of restructuring). We maintain our fair value estimate of Rs2200 and given limited upside (~4%) remain Neutral on the stock.

Source : Equity Bulls

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