State Bank of India - Mixed Bag on Asset Quality - Antique

State Bank of India (SBI) reported subdued 4QFY13 earnings at INR32.9bn, marginally below our estimates of INR36.6bn (consensus estimates were at INR37.4bn) on account of muted NII growth, higher provisioning and opex related expenses. While asset quality ratios improved on account of strong write-off's, restructuring continued to remain at elevated levels (Gross restructuring at INR86bn, net restructuring at INR83 bn) suggesting that the bank is still getting impacted by the stress in the economy. Share of stressed assets (Fresh slippages + restructuring) continued to remain high at INR142bn.

Asset quality showing signs of improvement on account of strong write-off's, however overhang on restructuring remains

Asset quality ratio for the bank improved with GNPA accretion declining at 4% QoQ on account of lower slippages and strong write-off's, resulting in GNPA ratio declining 55bps to 4.75%. Slippages in the current quarter were at INR 58bn (annualized slippage ratio at 2.2%) on the back of continued stress in Mid-corporate and SME segment. Slippages in the Mid-corporate and SME were at INR28bn with concentration in infrastructure, iron and steel, textiles related segment. However management has indicated that INR15-20bn account is likely to get upgraded in the next quarters. Gross additions to the restructured book increased by INR86bn during the quarter as the bank accounted for 3 chunky accounts amounting to INR 3.4bn (suzlon -INR 18bn, Reliance Power's Sasan project - INR11bn and Jindal Thermal - INR 5.3bn), thereby taking total restructured book to 3.0% of advances. CDR pipeline for the bank is at INR28bn for 1QFY14.Management has not given any guidance on slippages for FY14e and continues to maintain that asset quality pressures persist given the slowdown in economy.

Liability franchise stable; Margins to remain at 3.3-3.4% levels for FY14e

Calculated margins for the bank compressed by 20bps QoQ to 2.84%, on the back of declining yields in domestic assets as the bank had to make FITL provisions on account of increase in NPA's. On Liability franchise, despite the tough interest environment, CASA traction remained strong with CASA ratio expanding 120bps to 43.7% on back of strong accretion in current deposit (38%QoQ). Dependence on bulk deposit stood at 1.06% of deposits. Going forward management is guiding margins at 3.4% (with domestic NIM's at 3.6% levels and international NIMs at 1.50% levels), while loan growth of 20-24% and deposit growth of 20-25% for FY14e.

Valuation & outlook

We continue to maintain our cautious outlook on the stock, given the bank's fairly volatile performance, on stressed asset quality and increasing proportion of restructured book. Hence we are cutting our earnings estimates for FY14e and FY15e by 8% and 5% respectively to reflect the tough operating macro environment, thereby maintaining our target price of INR2300/share (1.24x FY15e P/BV) and our Hold recommendation on the bank.

Source : Equity Bulls

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