SBI - Q1FY14 Results - Kotak

Q1FY14: Asset quality pain continues to persist

- NII was flat (3.5% YoY), largely in line with our expectations on back of sharp NIM compression, even though loan book witnessed healthy growth (15.8% YoY). Nonetheless, net profit was even lower (decline of 13.6% YoY) primarily on back of higher operating expenses (31% YoY) as well as higher investment depreciation.

- Stellar performance on treasury fronts along with strong recovery from W/O accounts lifted the non-interest income. However, fee-based income remained weak on back of broad based subdued performance during last couple of quarters, which is disappointing in our view.

- The biggest disappointment came on the asset quality - fresh slippage reported during Q1FY14 was highest till date (Rs.137.7 bn; 5.1% on annualized basis), while up-gradation & cash recovery were modest (21% of fresh delinquencies) as against the run-rate of 47% seen during previous 4 quarters. Similarly, decline in the provision coverage ratio by ~600bps QoQ to 60.6% at the end of Q1FY14, does not bode well for the stock.

- Stock trades reasonable (1.0x FY14 ABV) after stripping the value of its subsidiaries. However, we believe near term outlook remains challenging due to NIM compression (YoY) impacting the revenue growth and unabating asset quality issues. We have cut the earnings estimate by ~11% for FY14E to take into account higher opex as well as higher credit costs. We retain ACCUMULATE rating on the stock with revised TP of Rs.1845 (Rs.2334 earlier) based on SOTP methodology where core business is valued at Rs.1379 (1.25x FY14E ABV) and subsidiaries are valued at Rs.466 (after giving 20% holding company discount).

Source : Equity Bulls

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