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State Bank of India
Detailed Report | 7 June 2012
Sector: Financials
Alpesh Mehta ([email protected]); +91 22 3982 5415
Sohail Halai ([email protected]); +91 22 3982 5430
Look beyond the feet
State Bank of India
7 June 2012 2
Indices and stock prices as on 5 June 2012
State Bank of India: Look beyond the feet
Page No.
Summary .............................................................................................................. 3
How SBIN has fared over the last two years ................................................ 4-5
Asset quality: Net stress loans lowest among PSBs ................................... 6-10
NIM: To remain healthy; CRR cut, capital raising to provide cushion .... 11-12
CASA ratio: Best among peers; challenges increased .............................. 13-14
Fee income: Granularity to ensure healthy growth ..................................... 15
Capitalization: Tier-I higher than peers; likely to improve ............................ 16
Earnings: Healthy core operations, absence of one-off provisions
to drive strong growth ............................................................................... 17-18
Valuations: Trading at 20% discount to LPA ............................................. 19-21
Financials and valuation ............................................................................. 22-23
State Bank of IndiaCMP: INR2,080 TP: INR2,725 Buy
Stock performance (1 year)
Shareholding pattern % (Mar-12)
Valuation summary (INR b)Y/E March 2012 2013E 2014E
NII 433 474 525
OP 316 359 405
NP 117 155 184
EPS (INR) 174.5 230.6 274.5
EPS Gr. (%) 34.0 32.2 19.0
ConsEPS(INR) 228.6 288.0 342.9
Cons P/E (x) 9.1 7.2 6.1
BV (INR) 1,251 1,429 1,641
Cons BV (INR) 1,583 1,819 2,099
Cons P/BV (x) 1.3 1.1 0.9
RoE (%) 15.7 17.2 17.9
RoA (%) 0.9 1.1 1.1
Domestic
Inst, 17.1
Others,
9.9
Foreign,
11.4
Look beyond the feetSignificant strengths outshine slippage concerns
In the last two years, State Bank of India (SBIN) has witnessed significant earnings
volatility and material change in core earnings parameters. 4QFY12 results, which
surprised positively, gave an indication of the bank’s sustainable earnings.
In this note, we (a) assess the significant changes that have happened in the last two
years in core operating parameters, and (b) address some of the key market concerns
relating to the bank.
We retain SBIN as our top pick in the sector, on the back of (a) strong improvement in
core operating performance, (b) one of the lowest net stress loans (NSLs) amongst
PSBs, and (c) one of the highest earnings CAGR of 25%+ over FY12-14. The stock trades
at 20%+ discount to LPA. Buy for 31% upside.
Contrary to perception, net stress loans lowest among PSBs: Over the last two
years, SBIN has reported significantly higher net slippages as compared to peers,
leading to the perception of higher asset quality issues. While reported net
slippages have been higher, restructured loans as a percentage of overall loans
are one of the lowest among public sector banks (PSBs).In FY12, SBIN reported
flat net stress loans (NSLs), while peers reported an increase of 75-140bp
excluding AI and SEBs and 170-450bp including AI and SEBs. Notably, SBIN has
the lowest NSLs (%), despite moderate loan growth. Despite taking the pain
upfront, SBIN has also managed to improve provision coverage ratio (PCR) on
the back of strong core operating performance (for further details, please refer
to our sector update dated 31 May 2012).
NIM to remain healthy; CRR cut, capital raising to provide cushion: Re-pricing of
high cost deposits, strong CASA traction and significant re-pricing of loan book
led to sharp improvement in SBIN’s FY12 NIM, despite higher net slippages. Its
peers, on the other hand, witnessed a 10-60bp decline in NIM. Fall in interest
rates, moderation in loan growth, rising competition for CASA deposits and
moral suasion by the Government of India (GoI) to reduce lending rates will put
pressure on NIM. However, reduction in CRR (release of INR130b, ~10bp NIM
push) and equity infusion (INR79b, ~5bp NIM push) will provide cushion.
Absence of one-off provisioning and loss on investments to aid earnings growth:
In FY12, SBIN’s earnings were marred by higher one-off provisions and loss on
investments (20% of PBT). Adjusting for these, core PBT would have already
been at ~1.8% (of average assets) as against the reported 1.4% in FY12 and 1.5%
in FY11. Lower base of fee income over FY11/12, coupled with continuous
traction in fees pertaining to transaction banking , letters of credit, bank
guarantees (over 75% of overall fee income in FY12) will lead to fee income
CAGR of 15% over FY13-14. Healthy NIM, higher fee income, control over opex,
and absence of one-offs will help SBIN to post earnings CAGR of 25%+ over
FY13-14, one of the highest among PSBs.
Bloomberg SBIN IN
Equity Shares (m) 671.0
52-Wk. Range (INR) 2,530/1,576
1,6,12 Rel.Perf.(%) 9/14/3
M.Cap. (INR b) 1,395.8
M.Cap. (USD b) 25.1
Detailed report | 7 June 2012
Sector: Financials
BSE SENSEX S&P CNX
16,021 4,863
7 June 2012 3
Promoter,
61.6
State Bank of India
7 June 2012 4
How SBIN has fared over the last two years
Even in a challenging environment, SBIN has delivered strong
margin performance, unlike its peers.
Focus shifted to NIM to achieve higher return ratios (%) SBIN only PSB to improve NIM YoY (%)
Increase in base rate and re-pricing of credit risk has led to
sharp improvement in yield on loans. Notably, SBIN's base
rate remains the lowest among PSBs.
While loan processing fees have declined, leading to
moderation in overall fee income growth, the growth in
transaction banking fees remains healthy.
Using size advantage, re-priced loan book aggressively (%) Fee income growth has moderated (%)
Cost to core income has improved significantly (%) Net investment loss a drag on profitability
Better core operating performance and control over opex has
led to sharp improvement in cost to core income.
Realized and MTM loss on investments for FY12 was INR15.8b
– 9% of PBT.
Sharp NIM improvement helped to take care of one-off
provisions without impacting earnings growth. SBIN's NIM
increased 50bp v/s 10-60bp decline for peers.
State Bank of India
7 June 2012 5
Strong margin performance and control over opex has led to
sharp improvement in core operating performance, despite
fees being under pressure.
Core PBT (ex one-offs and trading losses) for FY12 was INR225b
(v/s INR169b for FY11) as against reported PBT of INR186b, led
by SBIN’s strong underlying core performance.
Core operating profit growth bounced back sharply Core PBT excluding one-offs improved significantly (INR b)
Asset quality pressure remained high in FY12; however,
4QFY12 performance was a positive surprise.
Despite higher net slippages, SBIN achieved significant PCR
improvement, contrary to other PSBs.
Net stress (net slippages+addition to RL) has been high in FY12 PCR has improved significantly
SBIN: NSLs declined 50bp over FY10-12 (%) Stressed loan proportion increased across sector (ex SBIN) (%)
While NNPA has increased, standard restructured loans as a
percentage of overall loan book have declined, leading to
overall decline in stressed assets
SBIN is the only bank to report stable stressed loans; SEB and
AI constitute 10-300bp of stressed loan for large PSBs.
Source: Company/MOSL
State Bank of India
7 June 2012 6
Slippages higher than peers, but should be viewed in conjunction withrestructured assets On a reported basis, SBIN has shown higher net slippages as compared to peers.
However, we argue that asset quality performance should be seen after
considering restructured assets.
Unlike peers, SBIN has been aggressive in recognizing stress upfront and has lower
restructured loans on the balance sheet. Loan growth has been moderate over
the last two years, which puts it in a relatively better position than peers.
Over the last one year, while SBIN's net stress loans (ex AI and SEBs) have declined
15bp, for other PSBs, they have increased 75-140bp. (For details, please refer to
our sector update dated 31 May 2012).
In FY12, net slippage ratio has increased to 2%, the highest since FY04. Despite
being already on system-based NPA recognition in FY11, SBIN's net slippage ratio
increased in FY12. For other PSBs (ex-SBIN), the aggregate net slippage ratio was
1.6%.
While the initial part of the stress was witnessed in the agriculture and retail
segments, later, the mid and large corporate segments accounted for bulk of the
stress that got added to the balance sheet.
Higher GNPAs in the agriculture segment are explained to an extent by (a) lag
impact of the agri debt waiver scheme, and (b) lead bank status in remote locations
in India, compelling SBIN to have higher agriculture lending in those locations.
The management has also put special emphasis on recoveries and upgradations.
Hence, on a higher base, net slippages are unlikely to be higher than FY12. Though
some increase in restructured loans cannot be ruled out, we believe a large chunk
should be through cases under CDR, which would largely affect most banks under
the consortium.
Asset quality: Net stress loans lowest among PSBs
What has changed?: SBIN has witnessed significant asset quality improvement in 4QFY12.
Market concern(s): A challenging macroeconomic environment is likely to keep stress at
an elevated level.
Our view: On a reported basis, SBIN has shown higher net slippages as compared to
peers. However, we argue that asset quality performance should be seen after considering
restructured loans. While its asset quality could see some pressure, given the challenging
macroeconomic environment, considering its proactive NPA recognition, lower
restructured loans and special emphasis on recoveries and upgradations, SBIN’s net stress
loan additions are likely to be lower than FY12. Also, significantly higher base of FY12 NPA
provisions, healthy NIM and fee income growth will help SBIN to withstand higher net
slippages (similar to FY12, if any) and can still grow earnings at 25%+.
Please refer to our sector
update dated 31 May 2012
State Bank of India
7 June 2012 7
Evaluating SBIN’s performance on asset quality in FY12 v/s large PSBs For all other large PSBs, net stressed assets (NNPAs + OSRLs) as a percentage of
loans have increased by 75-140bp (excluding SEBs and AI) and by 170-450bp
(including SEBs and AI). For SBIN, net stressed assets as a percentage of loans
have remained flat in FY12 on a reported basis and declined ~15bp excluding AI.
Stress on net worth (adjusted for tax), assuming that 20% of the outstanding
standard restructured loans (ex SEBs and AI) turn into NPAs and outstanding
NNPAs, is less than 20%, in line with peers. Only BOB has lower stress on net
worth at 11%.
Despite high net slippages, SBIN is the only bank to witness PCR improvement in
FY12. SBIN’s PCR (including technical write-offs) is the second highest (after BOB)
amongst large PSBs. This is a significant reversal of the situation two years ago.
While increase in GNPAs (bp) is ... strong improvement in PCR (significant … led to lower NNPAs increase (bp)higher than peers... reversal of situation two years ago)… than peers
While SBIN reported stable NSLs YoY (%)… … other PSBs reported significant increase (%)
On reported basis, SBIN’s asset quality appears inferior to
peers. Its stressed assets have remained at 5.5-6%.
Of the 320bp increase in NSLs, 190b was on account of SEBs
and AI.
Aggregate NSLs for PSBs ex SBIN
State Bank of India
7 June 2012 8
Stress on NW of ~20% comparable to peers
FY10 FY11 FY12
SBIN 17.3 19.6 18.3
PNB 11.0 14.2 19.4
BOB 9.5 9.1 11.2
BOI 21.7 16.3 21.3
CBK 13.6 15.0 18.2
UNBK 16.1 17.7 24.4
Source: Company/MOSL
SBIN’s stress on NW has
remained largely stable,
in contrast to significant
increase for peers
Evaluating what has caused large stress in SBIN’s book SBIN has witnessed significantly higher net slippages in the agriculture, retail and
mid-corporate segments. GNPAs are as high as 9% for the agriculture segment.
Higher GNPAs in the agriculture segment are explained to an extent by (a) lag
impact of the agri debt waiver scheme, and (b) lead bank status in remote locations
in India, compelling SBIN to have higher agriculture lending in those locations.
In the mid-corporate segment, SBIN has been more proactive in recognizing
stressed loans than restructuring them. Industry-wise, Textiles and Iron & Steel
are the most problematic segments, where stress assets are as high as 20%+.
Proportion of stressed loans have increased (%) Strong loan CAGR helps PNB and BoB to contain NSLs proportion
SBIN is the only bank to report stable stressed loans; SEBs
and AI forms 10-300bp of stressed loans for large PSBs.
SBIN's NSLs should also be viewed in the context of moderate
loan growth.
Source: Company/MOSL
Break-up of GNPAs (%)
FY10 Loan FY11 FY11 Loan FY12 FY12 Loan
Mix (%) 1Q 2Q 3Q 4Q Mix (%) 1Q 2Q 3Q 4Q Mix (%)
Corporate 36 33 36 35 25 37 37 36 33 33 36
Overseas 15 8 8 9 9 14 8 7 7 6 15
SME 15 23 21 20 31 16 21 22 29 30 16
Agri 12 14 15 16 18 12 19 20 19 20 13
Retai l 21 22 20 20 17 21 15 14 12 11 20
Total 100 100 100 100 100 100 100 100 100 100 100
SME and Retail GNPA
share higher than
loan share
(%)
State Bank of India
7 June 2012 9
Industry-wise stress assets
O/S Loans GNPA GNPA RSL RSL GNPA GNPA
(INR m) (INR m) (%to o/s (INR m) (% to o/s + RSL + RSL (% to
loans) loans) (INR m) o/s loans)
Iron & Steel 444,280 35,770 8.1 24,940 5.6 60,710 13.7
Texti les 349,780 19,620 5.6 64,870 18.5 84,490 24.2
Engineering 250,310 16,740 6.7 16,690 6.7 33,430 13.4
Infrastructure 765,030 12,750 1.7 32,830 4.3 45,580 6.0
Overall 8,936,130 396,765 4.4 311,580 3.5 708,345 7.9
Source: Company/MOSL
Seasonal improvement
Agri and Retail net
slippages in 4QFY12 and
better than expected
performance in corporate
segment led to positive
surprise in 4QFY12
Net slippages down sharply in 4QFY12(INR m)
1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12
Corporate 1,020 15,320 11,110 12,990 10,390 21,180 33,180 2,130
International -430 3,430 570 2,580 490 1,600 5,280 -3,460
SME 4,060 3,660 -550 7,260 10,270 19,080 14,580 4,160
Agri 9,670 8,050 3,650 9,110 8,210 15,940 7,780 1,690
Retai l 4,850 1,330 2,450 -2,150 1,100 7,180 1,110 -7,900
Overall 19,170 31,790 17,230 29,790 30,460 64,980 61,930 -3,380
Source: Company/MOSL
Higher stress is visible in
the textiles and iron &
steel segments
Do 4QFY12 results mark the end of asset quality deterioration? In the quarter gone by, SBIN reported sharp decline in net slippages for the
agriculture and retail loan segments, which in our view was partially due to
seasonal factors (4Q and 1Q are the best quarters for upgradations/recoveries).
Given that there is higher stress in the macroeconomic environment and SBIN is
the largest lender, its asset quality could see some pressure, going forward.
However, considering its proactive NPA recognition, lower restructured loans and
special emphasis on recoveries and upgradations, SBIN’s net stress assets are
likely to be lower than earlier years.
SBIN's highly diversified loan book and management guidance of INR20b net
additions to GNPAs and lower than 4Q net additions to restructured loans also
provides comfort.
Significantly higher base of FY12 NPA provisions (due to higher net stress additions,
improvement in PCR and one-off provisions), healthy NIM and fee income growth
will help SBIN to withstand higher slippages (similar to FY12, if any) without
compromising earnings growth of 25%+.
Higher stress in SME and agri segments (%) Higher stress in SME, mid-corporate and agri segments (%)
FY11 FY12
State Bank of India
7 June 2012 10
Provision cover expected to improve going forward leading to decline in NNPA (%)
After excluding one-offs,
we have conservatively
modeled in credit costs at
similar levels as in FY12
Well-diversified loan book (%) Well-diversified industrial exposure (% of loans)
Agri loan break-up (%) Retail loan break-up (%)
Based on our
conservative credit cost
assumptions, we expect
provision coverage to
improve going forward
Credit cost and net slippage assumptions conservative; PCR expected to improve further (%)
State Bank of India
7 June 2012 11
NIM: To remain healthy; CRR cut, capital raising to providecushion
What has changed?: Focus has shifted to NIM improvement to achieve higher core
profitability.
Market concern(s): Slowing deposit growth and reversal in interest rate cycle could put
pressure on margins.
Our view: The trend of healthy NIM has continued into FY13. However, being conservative,
we factor in 15bp NIM decline in FY13.
NIM increased by a sharp 50bp in FY12 Under the new management, SBIN’s focus has shifted to generating higher NIM to
improve core profitability and provide for credit loss. Using its funding (driven by
strong liability mix, with high CASA share) and size (largest banking franchise in
the country) advantage, SBIN has extracted higher margins by deriving benefits
from both the asset and liability side.
SBIN’s NIM increased sharply (+50bp YoY) in FY12, driven by (a) a healthy ~135bp
improvement in yield on loans, led by re-pricing of portfolio yields, (b) relatively
higher share of incremental CASA deposits at ~30%, and (c) re-pricing of high cost
term deposits (cost of term deposits up just 75bp v/s 150bp for peers).
Notably, despite re-pricing its loans by hiking base rate faster than the industry
during FY12, SBIN’s base rate remains among the lowest in the industry. The
significant improvement in yield on loans, despite a stable loan portfolio mix and
significantly higher net slippages, was a positive surprise.
Adequate cushion available; factoring in 15bp NIM decline in FY13 A falling interest rate scenario, coupled with moderate economic growth and
moral suasion by GoI to reduce lending rates is leading to higher concerns on NIM
for the sector and SBIN in particular. Moreover, slowing deposit growth and reversal
in interest rate cycle could put pressure on margins.
However, some of the factors that will work in favor of SBIN are: (a) capital infusion
by GoI (INR79b, ~5bp NIM push), (b) FY12 NIM was impacted by higher interest
reversals on account of higher net slippages, (c) it still has the lowest base rate in
the system, and (d) reduction in CRR (release of INR130b, ~10bp NIM push).
Based on improved disclosures, SBIN has already demonstrated improvement in
margins on a MoM basis. The management has also highlighted that the trend of
healthy NIM has continued in the first two months of FY13.
While positive factors will give ~15bp NIM push, on a conservative basis, we factor
in 15bp NIM decline in FY13.
MoM movement in NIM (global, domestic and overseas) (%)
Mar-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12
Domestic 3.63 3.89 3.82 3.86 3.98 3.99 4.08 4.12 4.14 4.14 4.17
Overseas 1.37 1.66 1.59 1.62 1.70 1.77 1.75 1.72 1.82 1.79 1.70
Global 3.32 3.62 3.55 3.59 3.70 3.72 3.79 3.82 3.85 3.84 3.85
SBIN has been
witnessing continuous
up-tick in domestic
margins
State Bank of India
7 June 2012 12
Sharp improvement in yield on loans and strong control over
cost of funds have enabled SBIN to improve NIM.
SBIN has effectively demonstrated its pricing power in FY12.
Structurally moving towards higher NIM (%) … …led by sharp improvement in yield on loans* (%)
*calculated taking into consideration yield on overseas loans for BOB
In 4QFY12, SBIN’s cost of deposits increased just ~75bp YoY
v/s 100bp+ YoY for peers, due to downward re-pricing of high
cost deposits.
Re-pricing of high cost deposits enabled SBIN to achieve
lowest increase in cost of term deposits in FY12.
Strong control over cost of deposits (%) Lowest increase in cost of term deposits (bp)
Impact of 125bp CRR cut and capital infusion on NIM
Based on CRR of 6.0% Based on CRR of 4.75%
Assets % of B/S Yields Blended yield Assets % of B/S Yields Blended yield
CRR 6.0 0.0 0.0 CRR 4.8 0.0 0.0
SLR 31.0 7.8 2.4 SLR 31.0 7.8 2.4
Advances 60.0 11.0 6.6 Advances 61.3 11.0 6.7
Fixed & other assets 3.0 0.0 0.0 Fixed & other assets 3.0 0.0 0.0
Blended yield on funds 100.0 9.0 Blended yield on funds 100.0 9.1
Liabilities % of B/S Cost Blended cost Liabilities % of B/S Cost Blended cost
Total deposits 85.0 5.8 4.9 Total deposits 85.0 5.8 4.9
Borrowings 5.0 7.5 0.4 Borrowings 4.0 7.5 0.3
Networth & Other Liab. 10.0 0.0 0.0 Networth & Other Liab. 11.0 0.0 0.0
Total cost of funds 100.0 5.3 Total cost of funds 100.0 5.2
NIM 3.7 NIM 3.9
Expect ~15bp NIM benefit from regulatory actions and capital infusion.
State Bank of India
7 June 2012 13
CASA ratio: Best among peers; challenges increased
What has changed?: Contrary to the declining trend for other PSBs, SBIN's CASA ratio has
been stable.
Market concern(s): Will the current CASA ratio sustain, especially amidst rising competition
in a deregulated environment?
Our view: Despite SA deregulation, the large banks have not raised SA deposit rates. A
rate war for SA deposits is unlikely. The number of branches that SBIN has added in the
last three years is equivalent to the total number of branches that its private sector
peers have. Its formidable branch network gives SBIN a significant competitive advantage.
Unlike peers, SBIN has been able to maintain CASA ratio at FY10 levels Despite an elevated interest rate environment, SBIN has been able to maintain
its CASA ratio at levels similar to FY10. Its peers (ex-ICICIBC), on the other hand,
have reported a decline of 3-6pp in CASA ratio in last two years. The
outperformance was largely led by ~25% CAGR in savings accounts (SA) over FY08-
12 and moderating balance sheet growth over FY10-12.
While SA deposit growth moderated to 11% in FY12, the trend was similar for
most banks, given the elevated interest rate scenario.
Significant scope to improve SA deposits per branch SBIN’s extensive network of 14,709 branches has enabled it to consistently garner
low cost CASA deposits and render stability to its deposit base. Nearly half its
CASA deposits come from rural and semi-urban areas, where SBIN remains the
most preferred bank. In these areas, SBIN has 65%+ CASA ratio.
Despite the strong CAGR in SBIN’s SA deposits, its SA deposits per branch are just
INR266m. Though SBIN beats its PSB peers on this parameter, it is behind its private
peers – INR327m for HDFCB, INR288m for ICICIBC and INR343m for AXSB. There is
further scope for SBIN to improve.
Rate war for SA deposits unlikely; formidable branch network a competitiveadvantage Deregulation of SA deposits had raised concerns about possible increase in banks’
cost of funds, led by increase in SA deposit rates. While a few smaller private
banks increased their SA deposit rates by 150-250bp, the larger banks refrained
from doing so, despite tight liquidity. This indicates that a rate war for SA deposits
is unlikely.
SBIN has added over 2,700 branches in the last three years (for ICICIBC and HDFCB,
the total branch network stands at 2,752 branches and 2,544 branches,
respectively). The incremental contribution of these branches is expected to
increase as they ride through the cycle of maturity.
State Bank of India
7 June 2012 14
CASA ratio among highest in industry; reaping benefits of strong liability profile
Share of CA deposits in overall deposits low as comparedShare of SA deposits in overall deposits highest in industry (%) to private peers (%)
While most banks have reported sharp decline in CASA ratio since FY10, an extensive and diversified branch network has
enabled SBIN to maintain its CASA ratio.
Despite the sharp rise in interest rates, increase in the share
of SA deposits in overall deposits is impressive.
Attractive term deposit schemes for corporates and higher
interest rates are leading to cannibalization of CA deposits.
SA CAGR among highest in industry (%) Scope for improvement in branch productivity (INR m)
Strong presence in rural and semi-urban areas, where SBIN
remains the most preferred bank, is leading to strong
accretion in SA deposits.
SBIN’s SA deposits per branch are the highest among PSBs,
but are lower than large private banks.
(%) (bps)
State Bank of India
7 June 2012 15
Fee income growth moderated to 5% in FY12 v/s a CAGR of ~24% overFY06-11; expect fee income to grow at 15% over FY13-14 In FY12, SBIN saw sharp moderation in fee income growth to 5% v/s a CAGR of
~24% over FY06-11. This was due to (1) the new management’s focus on margins
rather than on revenue enhancement through fees, and (2) moderation in growth.
SBIN has leveraged its strong corporate/government relationships and superior
liability franchise to build in granularity and diversity in its fee income streams. In
FY12, transaction-related fees constituted over 55% of its fee income and grew
over 20% even in the challenging macro environment of FY12.
~20% of SBIN’s fee income is not balance sheet linked – LCs, BGs, etc, where SBIN
is not very aggressive and growth has remained healthy at ~15%. The significant
moderation in fee income growth is largely due to lower loan processing charges.
With SBIN leveraging its strengths of balance sheet size, extensive branch network
and large net worth to gain higher share of corporate/government business,
traction in transaction banking should remain strong. Lower base of loan processing
fees would provide cushion to earnings.
While the growth in loan processing fees is likely to remain subdued, we expect
healthy 15-20% growth in other avenues of fee income (which are more granular).
Fee income: Granularity to ensure healthy growth
What has changed?: Unlike the past, fee income growth has moderated sharply.
Market concern(s): Fee income growth might remain muted.
Our view: We are not unduly pessimistic on fee income growth. We expect fee income to
grow at 15% over FY13-14.
Highly granular fee income base (%) YoY growth in various fee income segments (%)
Fees to average assets highest among PSBs (%) Factoring modest fee income growth
State Bank of India
7 June 2012 16
Capitalization: Tier-I higher than peers; likely to improve
What has changed?: Capitalization has improved significantly since FY11; now in a
comfortable position.
Market concern(s): Is the current capitalization sufficient to take care of two years' growth?
Our view: In the near term, we do not see capitalization as a threat to growth for SBIN.
Capitalization has improved significantly since FY11 Equity infusion of INR79b, strong internal accruals of INR89b (post dividend), and
the management's conscious effort to optimize use of capital has yielded results.
SBIN's capitalization has improved significantly since FY11 - CAR now stands at
13.9% (v/s 12% as at FY11), with tier-I ratio at 9.8% (v/s 7.8% as at FY11). SBIN's core
tier-I now stands at 9.6%, one of the highest amongst peers.
SBIN has transferred its export portfolio of INR300b to an Export Credit Guarantee
Scheme and SME portfolio to SIDBI's Credit Guarantee Trust Scheme (CGTS). It has
also aggressively pruned unused credit lines for capital release. Consequently,
while its balance sheet and loan book grew 9% and 15%, respectively, risk weighted
assets increased by just 2% in FY12.
Do not see capitalization as a threat to growth The management's increased awareness on capital conservation is positive, and
would benefit the bank in the long term.
Apart from strong internal accruals (profit growth higher than balance sheet
growth), moderate growth and management's continuous efforts to utilize capital
efficiently will keep tier-I ratio healthy over FY13-14. In the near term, we do not
see capitalization as a threat to growth for SBIN.
Core tier-I ratio among the best in peers (%) Increased focus on preserving capital (YoY growth; %)
Strong internal accruals and management focus on conserving
capital will help keep core tier-I ratio at 9%+ over the next
two years.
While loans grew 14.7% and balance sheet grew 9.1% in FY12,
risk-weighted assets grew just 2%.
State Bank of India
7 June 2012 17
One-off provisions and trading losses overshadowed strong operatingperformance Superior margin performance (+50bp v/s stable/decline for peers in FY12) and
control over opex helped SBIN to post 40%+ earnings growth in FY12, on a lower
base.
The strong NIM performance was overshadowed by (1) higher slippages (core
credit cost of 115bp v/s average of 60bp over FY07-10), (2) moderation in fee
income, and (3) higher one-off provisioning (~INR23.7b), and (4) loss (MTM and
realized) on investments (INR15.8b), dragging down overall earnings growth. One-
off provisions and losses together contributed ~20% of SBIN's FY12 PBT.
Building of additional capacity for future growth, coupled with higher wage
provisioning kept cost to core income ratio under pressure (50%+ over FY09-11).
While the balance sheet grew at a CAGR of 13% over FY09-11, operating
expenditure increased at 21%. As a result, cost to average assets remained high at
over 2% - one of the highest amongst peers. However, in FY12, opex grew at a
moderate pace of less than 15%, as a large part of the capex is behind.
SBIN likely to achieve highest profit growth among PSBs over FY12-14 SBIN is likely to achieve the highest profit growth among PSBs over FY12-14, with
(1) superior NIM performance, (2) loan and fee income growth of 15%+, (3) high
operating leverage, and (4) absence of one-off expenses/provisions (20% of FY12
PBT) in FY13.
Growth in operating expenses over FY09-11 should be viewed in context of
capacity addition for the next growth phase - SBIN added ~17,037 employees (8%
of FY09 base), ~2,100 branches (18% of FY09 base) and over 11,500 ATMs (1.3x FY09
network). The benefits of these investments will be visible in coming years. We
expect cost to average assets to decline gradually from 2.05% in FY12 to 1.95% in
FY14.
While the economic environment remains challenging, SBIN has taken a large
part of the pain upfront in FY11/12 and has not resorted to aggressive restructuring.
Contrary to perception, its net stress loans are the lowest among PSBs.
While proactive recognition of stressed assets places SBIN in a relatively better
position than peers, we continue to remain conservative in our assumption of
credit cost at similar level of FY12.
Earnings: Healthy core operations, absence of one-offprovisions to drive strong growth
What has changed?: Core operating performance improved sharply, but this was besieged
by one-off provisions and trading losses.
Market concern(s): Volatility in asset quality could lead to significant volatility in earnings;
credit cost could surprise negatively.
Our view: SBIN is likely to achieve the highest profit growth among PSBs over FY12-14,
with (1) largely stable and superior NIM, (2) loan and fee income growth of 15%+, (3) high
operating leverage, and (4) absence of one-off expenses/provisions in FY13.
State Bank of India
7 June 2012 18
Conservatively factoring moderation in NIM (%) Core operating profit to average assets (%)
NII growth is likely to moderate on a higher base. Improvement in NIM and control over opex led to sharp
improvement in core operating profit.
Strong branch expansion... …leading to higher opex over FY08-11
SBIN has added ~2,100 branches since FY09; ageing of the
branches will lead to higher productivity.
We expect core cost to income ratio to remain at ~48% even
after factoring in one-off provisions related to wage revisions
for FY13-14.
Negative net investment gain impacted FY12 PBT Expect PAT CAGR of 25% over FY13-14
Higher treasury losses (in addition to higher credit costs)
impacted earnings in FY12.
Strong core operations, absence of one-off provisions and
stable credit cost will drive earnings.
4,866 branches added
(53% of FY07 base)
EE
State Bank of India
7 June 2012 19
Trading at 20%+ discount to long-term average valuations; Buy A challenging macroeconomic environment and asset quality issues over the last
couple of years have led to significant correction in valuations. SBIN is trading at a
discount of over 20% to its LPA valuations.
Strong core income performance is likely to continue and we have been
conservative on credit cost estimates, which would provide a cushion, if asset
quality surprises negatively.
Being a proxy to the Indian economy (25% market share), SBIN has historically
traded at a premium to other PSBs, despite its return ratios being lower. Over
FY12-14, SBIN's RoA and RoE are expected to converge with other PSBs.
We expect RoA to improve from 0.9% in FY12 to 1.1% by FY14 and RoE to improve
from 15.7% in FY12 to 17%+ by FY14. We retain SBIN as our top pick, with a price
target of INR2,725 (1.25x FY14E consolidated BV + INR102 for Insurance business).
Return ratios likely to improve
Valuations: Trading at 20% discount to LPA
What has changed?: SBIN is trading at a discount of over 25% to its long-period average
(LPA) valuations.
Market concern(s): Macroeconomic environment remains challenging; Negative surprise
on asset quality can cap valuations. The stock is trading at a premium to other PSBs.
Our view: Strong core performance is likely to continue and we have been conservative
on credit cost estimates, which would provide a cushion, if asset quality surprises
negatively.
P/E (one-year forward): Trading at ~30% discount P/BV (one-year forward): Trading at ~20% discount
State Bank of India
7 June 2012 20
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: M
OSL
State Bank of India
7 June 2012 21
DuPont Analysis: State Bank of India (%)
Avg. FY04-07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E
Net Interest Income 3.0 2.6 2.5 2.3 2.9 3.4 3.3 3.1
Fee income 0.9 0.9 0.9 1.0 1.0 0.9 1.0 1.0
Fee/Net Income Ratio 18.7 23.2 22.7 25.1 24.1 21.0 21.3 21.9
Core Operating Income 3.9 3.6 3.4 3.3 3.9 4.3 4.3 4.1
Operating Expenses 2.3 2.0 1.9 2.0 2.0 2.0 2.1 2.0
Cost/core Income ratio 59.8 54.9 54.9 60.9 52.1 47.1 48.2 47.6
Employee cost 1.6 1.2 1.2 1.3 1.3 1.3 1.3 1.2
Emp/Total Exp Ratio 68.7 61.8 62.3 62.8 66.1 65.1 64.9 63.8
Other operating expenses 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7
Core Operating Profits 1.6 1.6 1.5 1.3 1.9 2.3 2.2 2.1
Non Interest Income (ex fees) 0.7 0.4 0.6 0.5 0.4 0.2 0.3 0.3
Operating Profits 2.3 2.0 2.1 1.8 2.2 2.5 2.5 2.4
Provisions 0.9 0.4 0.4 0.4 0.9 1.0 0.8 0.7
NPA provisions 0.4 0.3 0.3 0.5 0.7 0.9 0.7 0.7
Other Provisions 0.5 0.1 0.1 0.0 0.2 0.1 0.1 0.1
PBT 1.4 1.6 1.7 1.4 1.3 1.4 1.7 1.7
Tax 0.5 0.6 0.6 0.5 0.6 0.5 0.6 0.6
Tax Rate 34.2 35.5 35.7 34.2 44.7 36.7 36.0 35.0
RoA 0.9 1.0 1.1 0.9 0.7 0.9 1.1 1.1
Leverage 19.2 16.0 15.8 16.3 17.4 17.2 16.0 16.3
RoE 17.9 16.8 17.1 14.8 12.6 15.7 17.2 17.9
Source: MOSL
Sharp improvement in
core operating income
led by higher focus
on NIM
Operating expenses as a
percentage of average
assets significantly higher
than other PSBs
impacting RoA
Higher credit cost already
factored in our estimates
Return ratios expected to
improve over FY13-14
AI: Air India
AXSB: Axis Bank
BG: Bank Guarantee
BOB: Bank of Baroda
CAGR: Compounded Annual Growth Rate
CAR: Capital Adequacy Ratio
CASA: Current and Savings Accounts
CRR: Cash Reserve Ratio
GoI: Government of India
HDFCB: HDFC Bank
ICICIBC: ICICI Bank
LC: Letter of Credit
LPA: Long Period Average
MoM: Month-on-Month
MTM: Marked To Market
Acronyms and abbreviations used in this report (arranged alphabetically)
NII: Net Interest Income
NIM: Net Interest Margin
NNPA: Net Non-Performing Asset
NW: Net Worth
OSRL: Outstanding Standard Restructured Loan
PBT: Profit Before Tax
PCR: Provision Coverage Ratio
PSB: Public Sector Bank
QoQ: Quarter-on-Quarter
RWA: Risk-Weighted Assets
SA: Savings Accounts
SBIN: State Bank of India
SEB: State Electricity Board
SME: Small and Medium Enterprises
YoY: Year-on-Year
State Bank of India
7 June 2012 22
Financials and Valuation
Income Statement (INR Million)
Y/E March 2009 2010 2011 2012 2013E 2014E
Interest Income 637,884 709,939 813,944 1,065,215 1,175,578 1,314,831
Interest Expense 429,153 473,225 488,680 632,304 701,940 789,509
Net Interest Income 208,731 236,714 325,264 432,911 473,638 525,322
Change (%) 22.6 13.4 37.4 33.1 9.4 10.9
Non Interest Income 126,908 149,682 158,246 143,515 181,067 205,863
Net Income 335,639 386,396 483,510 576,425 654,706 731,185
Change (%) 30.5 15.1 25.1 19.2 13.6 11.7
Operating Expenses 156,487 203,187 230,154 260,690 295,226 326,563
Pre Provision Profits 179,152 183,209 253,356 315,735 359,480 404,621
Change (%) 36.7 2.3 38.3 24.6 13.9 12.6
Provisions (excl tax) 37,346 43,948 103,813 130,902 117,694 121,254
PBT 141,806 139,261 149,542 184,833 241,786 283,367
Tax 50,594 47,600 66,897 67,760 87,043 99,179
Tax Rate (%) 35.7 34.2 44.7 36.7 36.0 35.0
PAT 91,212 91,661 82,645 117,073 154,743 184,189
Change (%) 35.5 0.5 -9.8 41.7 32.2 19.0
Consolidated PAT post MI 109,553 117,338 106,850 153,431 193,237 230,066
Change (%) 22.3 7.1 -8.9 43.6 25.9 19.1
*Core PPP is (NII+Fee income-Opex)
Balance Sheet (INR Million)
Y/E March 2009 2010 2011 2012 2013E 2014E
Equity Share Capital 6,349 6,349 6,350 6,710 6,710 6,710
Reserves & Surplus 573,128 653,143 643,510 832,802 952,360 1,094,709
Net Worth 579,477 659,492 649,860 839,512 959,070 1,101,419
Deposits 7,420,731 8,041,162 9,106,740 10,436,474 12,106,309 14,285,445
Change (%) 38.1 8.4 13.3 14.6 16.0 18.0
of which CASA Dep 3,089,778 3,800,397 4,615,214 4,879,890 5,551,659 6,318,172
Change (%) 22.4 23.0 21.4 5.7 13.8 13.8
Borrowings 840,579 1,030,116 1,195,690 1,270,056 1,425,299 1,602,221
Other Liabilities & Prov. 803,533 803,367 1,285,072 809,151 930,729 1,073,864
Total Liabilities 9,644,321 10,534,137 12,237,362 13,355,192 15,421,407 18,062,949
Current Assets 1,044,038 861,887 1,228,741 971,632 1,067,383 1,223,058
Investments 2,759,540 2,957,852 2,956,006 3,121,976 3,590,273 4,128,813
Change (%) 45.6 7.2 -0.1 5.6 15.0 15.0
Loans 5,425,032 6,319,142 7,567,194 8,675,789 10,063,915 11,875,420
Change (%) 30.2 16.5 19.8 14.7 16.0 18.0
Fixed Assets 38,378 44,129 47,642 54,666 62,481 70,831
Other Assets 377,333 351,128 437,778 531,130 637,356 764,827
Total Assets 9,644,321 10,534,137 12,237,362 13,355,192 15,421,407 18,062,949
Asset Quality (%)
GNPA (INR m) 157,140 195,349 253,263 396,763 508,170 622,228
NNPA (INR m) 96,774 108,702 123,469 158,187 171,840 186,202
GNPA Ratio 2.86 3.05 3.29 4.45 4.89 5.05
NNPA Ratio 1.78 1.72 1.63 1.82 1.71 1.57
PCR (Excl Tech. write off) 38.4 44.4 51.2 60.1 66.2 70.1
PCR (Incl Tech. Write off) 57.0 59.2 65.0 68.1 71.7 74.2
E: MOSL Estimates
State Bank of India
7 June 2012 23
Financials and Valuation
Ratios
Y/E March 2009 2010 2011 2012E 2013E 2014E
Spreads Analysis (%)
Avg. Yield-Earning Assets 8.3 7.8 8.0 9.2 8.9 8.6
Avg. Yield on loans 9.7 8.6 8.6 10.0 9.6 9.2
Avg. Yield on Investments 6.7 6.2 6.7 7.9 7.8 7.5
Avg. Cost-Int. Bear. Liab. 6.0 5.5 5.0 5.7 5.6 5.4
Avg. Cost of Deposits 5.9 5.6 5.0 5.7 5.5 5.3
Interest Spread 2.3 2.3 3.0 3.5 3.4 3.2
Net Interest Margin 2.7 2.6 3.2 3.8 3.6 3.4
Profitability Ratios (%)
RoE 17.1 14.8 12.6 15.7 17.2 17.9
RoA 1.1 0.9 0.7 0.9 1.1 1.1
Consolidated ROE 16.7 15.4 13.4 16.8 17.6 18.1
Consolidated ROA 1.0 0.9 0.7 0.9 1.0 1.0
Efficiency Ratios (%)
Cost/Income* 54.9 60.9 52.1 47.1 48.2 47.6
Empl. Cost/Op. Exps. 62.3 62.8 66.1 65.1 64.9 63.8
Busi. per Empl. (Rs m) 58.1 67.0 73.3 81.6 94.7 108.4
NP per Empl. (Rs lac) 4.7 4.5 3.9 5.3 7.1 8.3
Valuation
Book Value (INR) 913 1,039 1,023 1,251 1,429 1,641
BV Growth (%) 17.5 13.8 -1.5 22.2 14.2 14.8
Price-BV (x) 1.7 1.5 1.3
Consol BV (INR) 1,140 1,309 1,315 1,583 1,819 2,099
BV Growth (%) 17.6 14.8 0.4 20.4 14.9 15.4
Price-Consol BV (x) 1.3 1.1 0.9
Adjusted BV (INR) 806 919 887 1,086 1,250 1,447
Price-ABV (x) 1.9 1.7 1.4
Adjusted Consol BV 1,022 1,157 1,141 1,363 1,580 1,840
Price-Consol ABV (x) 1.5 1.3 1.1
EPS (INR) 143.7 144.4 130.2 174.5 230.6 274.5
EPS Growth (%) 34.8 0.5 -9.9 34.0 32.2 19.0
Price-Earnings (x) 11.9 9.0 7.6
Consol EPS (INR) 172.6 184.8 168.3 228.6 288.0 342.9
Con. EPS Growth (%) 21.6 7.1 -9.0 35.9 25.9 19.1
Price-Concol EPS (x) 9.1 7.2 6.1
Dividend Per Share (INR) 29.0 30.0 30.0 35.0 44.8 53.3
Dividend Yield (%) 1.7 2.2 2.6
E: MOSL Estimates
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Disclosure of Interest Statement State Bank of India1. Analyst ownership of the stock No2. Group/Directors ownership of the stock Yes3. Broking relationship with company covered Yes4. Investment Banking relationship with company covered No
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