SBI - Balance sheet clean up hits profit - Emkay

SBI's results extremely disappointing with NII of Rs80.6bn (down 10% qoq) and net profit of just Rs209mn. Sharp drop of 56bps qoq in NIMs to 3.04%

¾ Lower NII with Rs8.8bn of pension expenses, Rs32bn of NPA provisions (100% qoq), high tax rate drag the net profit down

Good thing – has cleaned up all liabilities like pensions, teaser rate loan provision, bad thing – low tier I of 7.77% and sharp rise in slippages to Rs56.4bn

Early rights issue holds the key. Cutting loan growth estimate to 17% (from 20%) for FY12/13. Cutting earning estimates by 13%/14%. Maintain HOLD with TP of Rs2,480

NII down 10% qoq on rising costs and lower yields

SBI's NII declined by 10% qoq to Rs80.6bn, below our as well as market expectations. The lower than expected growth in NII was led by 56bps qoq compression in NIM's to 3.0% as the costs rose by 22bps while the yields declined by 26bps

We believe that the rise in costs is on two counts (1) the recently raised retail tier II bonds at 9.5% and (2) higher bulk borrowings to fund growth in Q4FY11. Also during the quarter, the balances with RBI and overall cash balances (for ATMs) has seen a rise resulting in lower yields.

Benefit of the term deposit repricing may not materialize

During Dec-2008, SBI had accumulated large quantum of long term deposits at high rates of 10.5%. These deposits are due for repricing over CY11 (largely in Dec-11). However, we believe that large part of these benefits may be offset by higher rates being offered by SBI on short term deposits and also as we expect the domestic CDR to gradually come down from current high level of 76%. We expect SBI's NIMs to contract by 25bps for FY12 and believe that the NIMs are likely to remain near Q4FY11 level of 3%.

High slippages, taxes resulting in higher provisions

To our negative surprise, the slippages bounced back again to Rs56.4bn (we were expecting them to be lower than Q3FY11) in Q4FY11, resulting in almost doubling of the NPAs provisions. SBI has also provided standard asset provisions of Rs5.0bn on teaser rate home loans. In Q1FY12, SBI will have to do additional provisions of Rs10bn as per the new RBI norms for NPAs and standard asset provisioning.

During the quarter, the tax provisions has also remained high (almost 100% of PBT) as some portion of the pension expenses were not tax deductible and also as the provisions for NPAs are not tax deductible expenses.

Rights issue holds key to growth

As highlighted earlier, the tier I CAR of the bank has gone down to 7.77% at the end of FY11. What ails the bank further is the net NPLs/net worth ratio of almost 20%. We believe that the future growth in SBI's loan book now hinges very firmly on the passage of the rights issue. In the meantime we have cut our loan growth assumptions to 17% for FY12/13 compared to 20% earlier.

Valuation and view

We have cut our earnings estimates for FY12/13 by 13%/14% taking into account lower loan growth of 17% and NIMs contraction of 25bps for FY12. We have also raised our slippage estimate from 1.7% earlier for FY12 to 2.0% now. Add to that, the pension liabilities may give surprises if actuarial valuations change though we are building in Rs25bn of pension expenses for next two years. As highlighted earlier the rights issue now becomes very important for the company for future growth. We maintain HOLD rating on the stock while cutting price target to Rs2,480 (from Rs2700 earlier) valuing the consolidated banking operations at 1.4x FY13E ABV.

The stock closed the day at Rs.2355.70, down by Rs.57.90 or 2.40%. The total traded quantity was 14.02 lakhs compared to 2 week average of 7.32 lakhs.

The stock hit an intraday high of Rs.2398 and low of Rs.2331.15.

Source : Equity Bulls

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