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Alpesh Mehta ([email protected]); +91 22 3982 5415
Sohail Halai ([email protected]); +91 22 39825430
28 March 2014
Update | Sector: Financials
State Bank of IndiaCMP: INR1,840 TP: INR2,175 Buy
Best placed for economic recoveryEnviable SA franchise I Adequate capitalization I Dynamic management
Enviable liability franchise (SA ratio of ~35%), adequate capitalization
(tier-I of 10% post recent equity infusion), and lowest net stress loans
(6.7%) position SBIN as best placed to benefit from an upturn in the
economic cycle.
Core operating profitability is likely to bottom out in FY14, as initiatives by
the new management would lead to higher fees and fall in overhead
expenses. The new Chairperson has outlined four key focus areas - NIM,
operating leverage, NPA, HR - to improve core profitability.
SBIN has underperformed the Sensex and Bankex by 29% and 22%,
respectively over last one year due to weak macro environment and fall in
profitability. With the economy bottoming out, we expect a stock re-
rating. We reiterate Buy and roll over our target price to FY16 to INR2,175
(0.9x FY16E consolidated BV + INR120 for Insurance).
Unmatched SA franchise; SA ratio to remain best in class
Strong expansion over FY09-13 has helped SBIN to strengthen its foothold
in the SA market. Despite deregulation of SA rates, SBIN’s SA growth has
remained in line with or better than industry. SBIN group market share inSA across rural, semi-urban and metro locations remains 25%+. In semi-
urban locations, it remains the undisputed leader, with ~38% market share.
Better product offering, superior technology of private banks and lack of
focus by the management had led to a sharp drop (10%+ across locations)
in SBIN’s CA market share. The new management is focused on improving
its CA wallet share, leveraging its corporate relationships.
Net stress loans among the lowest
Historically, SBIN has been conservative in terms of NPA recognition. Its net
stress loans remain one of the lowest among state-owned banks (PSBs) at
6.7%. Net stress loans for PNB, BOB, BOI and CBK stand at 12.4%, 7.9%,
6.3% and 8.8%, respectively.
Over FY04-09, recoveries and upgrades as a percentage of opening GNPA
stood at 33%, which further improved to ~40% over FY10-13. Due to sharp
moderation in economic growth, this ratio has moderated to 25%
(annualized) in 9MFY14. While our estimate for the full year is ~27%,
bottoming out of macro-economic issues can provide strong upside to ABV
and earnings.
Sensitivity of NIM and credit cost to return ratios is high. With a 10bp fall in
credit cost and 10bp improvement in NIM, RoA / RoE will improve by 11bp/ 180bp+, and earnings will see an upgrade of 18%.
BSE Sensex S&P CNX
22,214 6,642
Stock Info
Bloomberg SBIN IN
Equity Shares (m) 746.6
52-Week Range (INR) 2,469/1,453
1, 6, 12 Rel. Per (%) 16/-1/-29
M.Cap. (INR b) 1,371.5
M.Cap. (USD b) 22.8
Shareholding pattern (% )
As on Dec-13 Sep-13 Dec-12
Promoter 62.3 64.1 61.6
Dom. Inst 17.9 18.2 17.2
Foreign 11.5 12.1 12.3
Others 8.2 8.4 8.9
Stock Performance (1-year)
Investors are advised to refer through disclosures made at the end of the Research Report.
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State Bank of India
28 March 2014 2
Dynamic management at the helm of affairs
The new Chairperson, Ms Arundhati Bhattacharya has outlined four key
focus areas (NIM, operating leverage, NPA, HR) to improve the bank’s core
profitability.
Our recent interactions suggest that the management is aggressively
focusing on improving employee and branch productivity, and controlling
overhead expenses, the benefits of which are likely to be realized with a lag.
Ms Bhattacharya’s longer tenor (three years) and willingness to moderate
growth to improve return ratios is a key positive, in our view.
Healthy earnings growth; adequate capitalization; reiterate Buy
SBIN recently raised INR100b, which led to an improvement in its CET1
capital to ~10%, one of the highest among the large PSBs. In our view,
current capitalization is sufficient to take care of 12-18 months’ growth
requirement. One of SBIN’s key strengths is its ability to maintain high share of core
income, led by higher NIM (due to high SA ratio) and relatively higher share
of fees (as compared to peers). In FY14, we expect core PPP to bottom out,
as initiatives by the new management will lead to higher fees and decline in
overhead expenses. Employee expenses are on the higher side due to one-
off provisioning for pension and wage hike.
Higher than expected net trading gains and decline in credit cost can
provide upside to our earnings estimates. We expect SBIN to achieve
earnings CAGR of 18% over FY14-16, one of the highest among PSBs.
One-year forward P/BV
0.9
2.3
1.2
0.60.3
1.1
1.9
2.7
M a r -
0 4
J u n -
0 5
S e p -
0 6
D e c -
0 7
M a r -
0 9
J u n -
1 0
S e p -
1 1
D e c -
1 2
M a r -
1 4
PB (x) Peak(x) Avg(x) Min(x)
Source: Company, MOSL
RoE bottomed out; gradual recovery in asset quality (%)
0.0
1.0
2.0
3.0
4.0
5.0
10.0
15.0
20.0
25.0
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1
F Y 1 2
F Y 1 3
F Y 1 4 E
F Y 1 5 E
F Y 1 6 E
RoE NNPA
Source: Company, MOSL
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State Bank of India
28 March 2014 3
Unmatched SA franchise; SA ratio to remain best in class
SBIN is the only PSB that has been able to retain its market share in SA deposits
at 29% since FY94, even post the emergence of private banks. Other PSBs lost
market share at a pace of 1% each year since FY00, that is, a cumulative loss of
13%+ market share in the last 13 years.
SBIN group market share in SA across rural, semi-urban and metro locations
remains at 25%+. In semi-urban locations, it remains the undisputed leader,
with ~38% market share.
Further, the strength of SBIN’s liability franchise was tested, when SA deposit
rates were deregulated. However, strong expansion over FY09-13 and a strong
brand has helped SBIN to strengthen its foothold in the SA market. SBIN’s SA
growth has remained in line with or better than industry.
However, its positioning in CA is weak, Better product offering, superior
technology of private banks and lack of management focus led to a sharp drop
(10%+ across locations) in SBIN’s CA market share. The new management is
focused on improving its CA wallet by share, leveraging its corporate
relationships.
Overall, SBIN has been able to maintain a strong CASA ratio of 40%+, which also
gives it a funding advantage, allowing it to keep its base rate low and attract
quality borrowers.
Resilient market SA share amidst different cycles (%)
63.5
49.2
29.0 29.8
5.0 18.5
F Y 9 4
F Y 9 5
F Y 9 6
F Y 9 7
F Y 9 8
F Y 9 9
F Y 0 0
F Y 0 1
F Y 0 2
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1
F Y 1 2
F Y 1 3
SBIN Nationalized Private
Source: Company, MOSL
Holding SA share in urban areas, gaining traction in rural (%)
23.4
26.2
38.1 38.4
24.2
23.7
F Y 0 0
F Y 0 1
F Y 0 2
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1
F Y 1 2
Rural Semi-Urban Urban
Source: Company, MOSL
SA ratio improving (%)
20 21 22
25 26
30 30 29 27
3235 35 35 34
F Y 0 1
F Y 0 2
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1
F Y 1 2
F Y 1 3
F Y 1 4 E
Source: Company, MOSL
SA growth remains strong despite higher base (%)
15.2 17.0 17.8 17.8 17.9 20.6
34.2 36.6
46.3
C B K
P N B
B o B
U N B K
B o I
S B I N
H D F C B
I C I C I B C
A X S B
CAGR (FY03-13)
Source: Company, MOSL
SBIN able to retain SA
deposit market share at
~29% since FY94 even post
emergence of private banks
Strong presence in semi-
urban areas; gaining
traction in rural region
Significant drop in CA
market share; expect
renewed focus to stall the
declining trend
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State Bank of India
28 March 2014 4
CA market share has dropped significantly (%)…
37.4
19.1
50.8
43.8
5.4
26.8
F Y 9 4
F Y 9 5
F Y 9 6
F Y 9 7
F Y 9 8
F Y 9 9
F Y 0 0
F Y 0 1
F Y 0 2
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1
F Y 1 2
F Y 1 3
SBIN Nationalized Private
Source: Company, MOSL
…resulting in continuous drop in CA ratio (%)
1716 15 16 15
18 19 18
15 15
14
9 98
F Y 0 1
F Y 0 2
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1
F Y 1 2
F Y 1 3
F Y 1 4 E
CA Ratio (%)
Source: Company, MOSL
Net stress loans one of the lowest; economic recovery can provide delta
The challenging economic environment has led to stress addition in the balance
sheets of PSBs, including SBIN.
SBIN’s conservative approach led to higher NPAs than restructuring. Hence, the
percentage of restructured standard loans for SBIN is 3.4%, against 4.6-9.6% for
peers. Consequently, SBIN’s net stress loans are also one of the lowest within
PSBs, at 6.7% (PNB: 12.4%, BOB: 7.9%, BOI: 6.3%, CBK: 8.8%).
With improvement in the economic environment, there should be an increase in
recoveries. Over FY04-09, recoveries and upgrades as a percentage of opening
GNPA stood at 33%, which further improved to ~40% over FY10-14E.
Due to sharp moderation in economic growth, this ratio has moderated to 25%(annualized) in 9MFY14. While our estimate for the full year is ~27%, bottoming
out of macro-economic issues can provide strong upside to ABV and earnings.
Net slippages peaked; expect improvement in FY15 (%)
2.3
0.7
-0.2
0.7
1.41.1 1.1
1.6
2.0 2.0
2.7
1.71.4
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1
F Y 1 2
F Y 1 3
F Y 1 4 E
F Y 1 5 E
F Y 1 6 E
Net Slippage Ratio
Source: Company, MOSL
Significant stress accounted for; net slippages over FY11/14
as percentage of opening loans highest for SBIN (%)
697 182 152 133 115 106
37
30
27
2522
28
SBIN PNB BoB BoI CBK UNBK
FY11/14 Net slippages on FY11 book
Source: Company, MOSL
Conservatively factored
lower recoveries and
upgrades; economic
recovery could provide
significant cushion to asset
quality
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State Bank of India
28 March 2014 5
NPA peaked; expect gradual improvement
12.1
9.4
7.7
6.0
3.62.9 3.0 2.9 3.0 3.3
4.5 4.8 5.5 5.3 4.9
5.64.5
3.42.6 1.9 1.6 1.8 1.8 1.7 1.6 1.8 2.1
3.2 3.2 2.9
F Y 0 2
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1
F Y 1 2
F Y 1 3
F Y 1 4 E
F Y 1 5 E
F Y 1 6 E
GNPA (%) NNPA (%)
Source: Company, MOSL
GNPA and NNPA highest among peers
5.5
4.7
3.8
3.3
2.8
2.7
3.3
1.0
2.4
1.4
2.2
1.5
SBIN
PNB
UNBK
BoB
BoI
CBK
GNPA (%)
2014 2011
3.2
2.5
2.2
1.7
1.5
2.4
1.6
0.8
1.2
0.3
0.9
1.1
NNPA (%)
2014 2011
Source: Company, MOSL
OSRL lowest among peers, reflecting strategy of recognizing
stress upfront (% of loans)
0.0
5.0
10.0
1 Q F Y 1 2
2 Q F Y 1 2
3 Q F Y 1 2
4 Q F Y 1 2
1 Q F Y 1 3
2 Q F Y 1 3
3 Q F Y 1 3
4 Q F Y 1 3
1 Q F Y 1 4
2 Q F Y 1 4
3 Q F Y 1 4
SBIN PNB CBKBoB BoI UNBK
Source: Company, MOSL
Net stress loans (NNPA+OSRL) lower than peers (%)
0.0
5.0
10.0
15.0
1 Q F Y 1 2
2 Q F Y 1 2
3 Q F Y 1 2
4 Q F Y 1 2
1 Q F Y 1 3
2 Q F Y 1 3
3 Q F Y 1 3
4 Q F Y 1 3
1 Q F Y 1 4
2 Q F Y 1 4
3 Q F Y 1 4
SBIN PNB CBKBoB BoI UNBK
Source: Company, MOSL
Strong economic phase could lead to faster than expected recovery and aid asset quality (INR b)
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
Opening GNPA 135 127 117 96 100 128 157 195 253 397 512 689 769
Slippages 57 43 43 50 79 111 118 181 247 320 418 394 387
Gross Slippage Ratio (%) 4.2 2.7 2.1 1.9 2.3 2.7 2.2 2.9 3.3 3.7 4.0 3.3 2.8
Upgrades & Recoveries 26 32 47 32 32 64 60 83 96 149 141 190 192
% of Opening GNPA 19.1 24.9 39.9 33.2 32.5 49.6 38.4 42.7 38.0 37.5 27.5 27.5 25.0
Net Slippages 31 11 -3 18 47 48 58 98 151 171 277 205 195
Net Slippage Ratio (%) 2.3 0.7 -0.2 0.7 1.4 1.1 1.1 1.6 2.0 2.0 2.7 1.7 1.4
Source: Company, MOSL
Core profitability bottomed out; risk-adjusted NIM to improve
SBIN’s risk-adjusted NIM has declined to a low of 2.1%. The recent capital
infusion and increase in base rate would support NIM in the near term, while
the expected decline in net slippages would in medium term boost NIM.
Further, credit cost should decline with a lag. This could translate into strong
improvement in return ratios.
Sensitivity of NIM and credit cost to return ratios is high. With 10bp fall in credit
cost and 10bp improvement in NIM, RoA / RoE will improve by 11bp / 180bp+and earnings will see an upgrade of 18%.
Risk-adjusted NIM expected
to have bottomed out; 10bp
improvement in NIM and
10bp in decline in credit
cost could lead to earnings
upgrade of 18%
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State Bank of India
28 March 2014 6
Risk-adjusted NIM has moderated significantly; should stabilize (%)
1.7
1.9
2.9
3.2
2.6
2.3 2.2
1.92.1
2.52.3
2.3 2.1 2.1
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E Source: Company, MOSL
Sensitivity analysis suggests strong upside in earnings for every 10bp change in NIM and credit cost (INR)
Base Case10bp decline in
credit costChange
10bp
improvement in
NIM
Change Combined Impact Change
FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E
EPS 218 260 234 279 7.6 7.3 242 288 11.0 10.8 258 307 18.5 18.1
BV 2,069 2,281 2,083 2,311 0.7 1.3 2,089 2,324 0.9 1.9 2,102 2,353 1.6 3.2
ROA % 0.6 0.7 0.7 0.7 5 5 0.7 0.7 7 7 0.7 0.8 11 11
RoE % 11.4 12.4 12.2 13.1 79 75 12.6 13.5 114 110 13.4 14.2 193 183
Source: Company, MOSL
Dynamic management at the helm of affairs
The new Chairperson, Ms Arundhati Bhattacharya has outlined four key focus
areas (NIM, operating leverage, NPA, HR) to improve the bank’s core
profitability.
Our recent interactions suggest that the management is aggressively focusing on
improving employee and branch productivity, and controlling overhead
expenses, the benefits of which are likely to be realized with a lag.
Ms Bhattacharya’s longer tenor (three years) and willingness to moderate
growth to improve return ratios is a key positive, in our view.
Healthy earnings growth; adequate capitalization; reiterate Buy
SBIN recently raised INR100b, which led to an improvement in its CET1 capital to
~10%, one of the highest among the large PSBs. In our view, current
capitalization is sufficient to take care of 12-18 months’ growth requirement.
One of SBIN’s key strengths is its ability to maintain high share of core income,
led by higher NIM (due to high SA ratio) and relatively higher share of fees (as
compared to peers). In FY14, we expect core PPP to bottom out, as initiatives by
the new management will lead to higher fees and decline in overhead expenses.
Moreover, SBIN is already providing for retirement benefits based on LIC’s new
mortality tables that prescribe an average life expectancy of 81 years. We
believe most other banks are factoring in lower life expectancy.
Higher than expected net trading gains and decline in credit cost can provide
upside to our earnings estimates. We expect SBIN to achieve earnings CAGR of
18% over FY14-16, one of the highest among PSBs.
New management focus
remaining on NIM,
operating leverages, NPA
and HR
10.29.6
9.2
8.1 8.1
7.0
SBIN BoB PNB BoI CBK UNBK
Tier I
Better capitalized than peers
(Tier 1, %)
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State Bank of India
28 March 2014 7
Fee income growth has moderated; now a focus area (%)
0.8 0.8 0.8
0.9 0.9 0.9 0.91.0
1.00.9
0.8
0.7 0.7 0.7
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1
F Y 1 2
F Y 1 3
F Y 1 4 E
F Y 1 5 E
F Y 1 6 E
Fee income to average assets
Fee income to average assets higher than peers (%)
0.7
0.5
0.50.4
0.4 0.4
SBIN PNB CBK UNBK BoI BoB
Fee income to average assets FY14
Opex to average assets has remained sticky for SBIN (%)
1.5 1.6 1.6 1.7 1.51.2 1.2 1.3 1.3 1.3 1.3 1.4 1.3 1.2
0.6 0.7 0.7
0.80.7
0.7 0.7 0.7 0.7 0.7 0.8
0.80.8 0.8
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1
F Y 1 2
F Y 1 3
F Y 1 4 E
F Y 1 5 E
F Y 1 6 E
Employees Other Opex
Opex to average assets significantly higher than peers (%)
1.4
1.3
1.0
0.8
0.8
0.7
0.8
0.6
0.6
0.5
0.5
0.5
SBIN
PNB
UNBK
CBK
BoI
BoB
Employee Other Opex
Contribution of non-core income has declined (%)
0.7
1.1
0.8
0.6
0.4 0.4
0.60.5
0.4
0.20.3 0.3 0.3 0.3
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1
F Y 1 2
F Y 1 3
F Y 1 4 E
F Y 1 5 E
F Y 1 6 E
Non-core income
Source: Company, MOSL
Earnings CAGR over FY14-16 (%)
Source: Company, MOSL
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State Bank of India
28 March 2014 8
Core operating profitability likely to have bottomed out; expect gradual improvement (%)
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
Net Interest Income 2.7 2.9 3.2 3.28 2.84 2.64 2.48 2.35 2.86 3.38 3.06 2.94 2.85 2.81
Fee income 0.8 0.8 0.8 0.92 0.91 0.92 0.90 0.96 1.02 0.95 0.79 0.72 0.70 0.69
Fee/Net Income Ratio 19.2 16.8 17.0 19.14 22.22 23.17 22.70 25.06 24.08 21.01 18.99 18.13 18.07 18.15
Core Operating Income 3.5 3.7 4.0 4.20 3.75 3.57 3.38 3.31 3.88 4.33 3.85 3.66 3.55 3.51
Operating Expenses 2.1 2.4 2.3 2.46 2.23 1.96 1.86 2.01 2.02 2.04 2.02 2.23 2.11 2.04
Employee cost 1.5 1.6 1.6 1.70 1.50 1.21 1.16 1.26 1.34 1.33 1.27 1.42 1.29 1.19
Other opex 0.6 0.7 0.7 0.76 0.73 0.75 0.70 0.75 0.69 0.71 0.75 0.81 0.82 0.84
Core Operating Profits 1.3 1.3 1.7 1.74 1.52 1.61 1.52 1.29 1.86 2.29 1.83 1.43 1.44 1.47
Other Income (ex fees) 0.7 1.1 0.8 0.63 0.36 0.42 0.60 0.52 0.37 0.18 0.32 0.32 0.32 0.32
Operating Profits 2.1 2.4 2.5 2.37 1.89 2.03 2.13 1.82 2.23 2.47 2.14 1.75 1.76 1.79
Provisions 0.7 1.2 1.0 0.92 0.45 0.41 0.44 0.44 0.91 1.02 0.77 0.82 0.81 0.81
NPA provisions 0.9 0.9 0.3 0.03 0.27 0.31 0.29 0.46 0.74 0.90 0.73 0.65 0.73 0.74
Other Provisions -0.3 0.2 0.8 0.89 0.18 0.10 0.15 -0.02 0.17 0.12 0.03 0.17 0.08 0.08
PBT 1.4 1.3 1.5 1.45 1.44 1.62 1.68 1.38 1.31 1.44 1.38 0.94 0.95 0.98
Tax 0.6 0.3 0.5 0.52 0.58 0.58 0.60 0.47 0.59 0.53 0.40 0.29 0.30 0.31Tax Rate 41.0 26.0 34.0 36.19 40.45 35.54 35.68 34.18 44.73 36.66 29.30 31.50 31.50 31.50
RoA 0.8 0.9 1.0 0.92 0.86 1.04 1.08 0.91 0.73 0.91 0.97 0.64 0.65 0.67
Leverage (x) 21.8 20.9 19.6 18.44 18.00 16.04 15.76 16.37 17.56 17.54 16.40 16.30 16.73 17.73
RoE 18.0 19.7 19.4 17.04 15.41 16.75 17.05 14.87 12.75 16.05 15.94 10.44 10.89 11.89
Source: Company, MOSL
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State Bank of India
28 March 2014 10
Financials and Valuation
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State Bank of India
28 March 2014 11
N O T E S
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State Bank of India
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Disclosure of Interest Statement STATE BANK OF INDIA
1. Analyst ownership of the stock No 2. Group/Directors ownership of the stock Yes
3. Broking relationship with company covered No
4. Investment Banking relationship with company covered No
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