Buy State Bank of India
Target : RS 2556
CM Price: RS 2,228.90
Core banking sound, provisions hit profits…
SBI reported a marginal improvement of 29 bps YoY in its loan book market share for FY10. The loan book grew 17% YoY to Rs 6414 billion while deposit growth was subdued at 8% YoY at Rs 8041 billion. The bank carried excess liquidity on the balance sheet of ~Rs 44,000 crore in Q4FY10 and ~Rs 75,000 crore in FY10. Net profit was dragged down due to higher operating expense in Q4FY10, scaling up of provision coverage to 59% and lower treasury gains. Going forward, we expect16% CAGR in PAT and 17% CAGR in the business mix over FY09-FY12E.
NIM improves on lower CoD…
The CoD declined to 5.8%, an improvement of 50 bps YoY and 12 bps QoQ, on two counts. The first was due to shedding of bulk deposits, which reduced to 1.8% of total domestic deposits. Also, CASA grew from 39% in FY09 to 47% in FY10. This led to 39% YoY growth in NII to Rs 6,721 crore (our estimate was Rs 6,716 crore) while the NIM improved by 57 bps YoY and 14 bps QoQ to 2.96% in Q4Y10.
Operating expenses drag down profits
Operating costs rose as staff expenses and overheads increased leading to a worsening cost to income ratio of 54% and Rs 923-crore dent in Q4FY10 profits. The bank provided close to Rs 109 crore for wage revision and Rs 277 crore towards pension contribution for its employees.
This led to a 21% YoY decline in PAT to Rs 2,620 crore in Q4FY10. On a standalone basis, PAT declined by 32% to Rs 1,867 crore, lower than our estimate of Rs 2,841 crore.
Provision coverage a major cause for concern
The bank increased its loan loss provision from Rs 1,807 crore in Q3FY10 to Rs 2,797 crore in Q4FY10. Provision coverage excluding technical write-offs was at 44.4% and including write-offs stood at 59.2%.
Valuation
With expected capital dilution of 10-15% in FY11E and hit on profitability due to increased provisions, we expect the bank to deliver RoA and RoE at around ~1% and ~15% by FY12E respectively. With huge B/S size of Rs.10 lakh crore, we expect core bank to trade at 1.7X FY12E ABV and on SOTP basis recommend a BUY on the stock with a target price of Rs 2556.
Non interest income declines as treasury profits dip
Non interest income declined by 4% to Rs 4,509 crore on account of a decline in treasury profits to Rs 426 crore in Q4FY10 against Rs 1,509 crore in Q4FY09. Profit on G-secs reduced profits by Rs 1,389 crore as a result of increasing bond yields. However, fee income gained by 35% YoY to Rs 3,486 crore due to steady improvement in the CASA, cross selling, loan processing and other services.
Over 10000 ATMs and 1000 branches added during FY10 have led to opex rise and even higher wage and pension provisioning has led to staff cost surging over 50% in one quarter 315 in full year. Bank has guide for a cost to income ratio of less than 45% for coming year.
NPA status quo maintained…
Growth in NPA slowed down in Q4FY10 as both the NNPA and GNPA ratio improved QoQ to 3.05% and 1.72%, respectively. The NNPA decreased 3.6% QoQ to Rs 10,870 crore but GNPA rose by 3.6% QoQ to Rs 19,535 crore. Restructured assets stand at Rs 16,796 crore out of which Rs 1,616 crore slipped into NPA. We expect NPA levels to stabilise with the GNPA ratio at ~3% and NNPA ratio at ~1% by FY12E.
We have built in a provision coverage ratio of ~67% by FY12E. This would impact profits, going ahead. We expect PAT growth to be around 16% CAGR over FY10-12E.
Major Subsidiaries doing well too….
SBI AMC growing faster
SBI mutual has shown extremely sharp rise of 42% in AUM to Rs.37147 crore. As can be seen, market share has risen sequentially to 5.2%. If we see Birla Sunlife and Reliance Mutual Fund, they have lost market share over the past one year whereas SBI has maintained it at 4% of FY12E AUM the AMC is valued at Rs.22 per share.
SBI Life leading the private life insurer space…
Gross written premium grew to Rs.10104 crore in FY10 from Rs.1075 crore in FY06 which is a 10 fold growth. New business premium grew to Rs.7033 crore from Rs.5386 crore. APE growth was also strong at 38% for FY10. We expect 20-25% rise in GWP even though we see the regulatory environment is changing landscape from capping charges to lowering commission and higher disclosures.
If we see the industry has seen a 25% growth in first year premium with single premium growing faster at 33% y-o-y and non single growing at 20%. SBI Life’s market share has jumped from 14% in FY08 to18% in FY10. The company made a profit of Rs.276 crore for FY10 against Rs.26 crore loss last year. We value SBI’s share in SBI Life at Rs.176 per share on FY11 basis and Rs.190 on FY12 basis.
Report card
| Attribute | Value | Date |
|---|---|---|
| PE ratio | 15.04 | 26/05/10 |
| EPS (Rs) | 144.37 | Mar, 10 |
| Sales (Rs crore) | 17,965.59 | Mar, 10 |
| Face Value (Rs) | 10 | |
| Net profit margin (%) | 12.03 | Mar, 09 |
| Last dividend (%) | 200 | 11/05/10 |
| Return on average equity | 15.74 | Mar, 09 |
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