>State Bank of India (CITI)

4Q09 Results: Margin(al) Pressure, But Balance Sheet is Fine

■ Up 46% yoy, ahead of estimates; but P&L shows signs of pressure — SBI's profits were supported by robust fee growth and large treasury gains, but its aggressive pricing strategy pulled down NIMs and earnings quality. SBI's P&L appears to be 'paying the price of growth' (but can also be fixed faster), while balance sheet quality remains slightly ahead (and therein lies the risk). We see risk/reward for SBI as relatively balanced, with slight positive skew due to incipient signs of economic stabilization.

■ NIMs were the key disappointment, but can be pulled back quickly — SBI's NIMs were down ~70bps qoq (but a reasonable 293bps for FY09) – recovery is always a challenge, but can be pulled back quickly (management confident, track record favorable). Core fee growth remained robust (+29% yoy) and along with treasury gains eased pressure on earnings. Between lower NIMs and likely higher costs (distribution expansion) – the P&L does seem to be weighed down at the moment, but can change relatively fast with the environment.

■ Balance sheet remains healthier — SBI's balance sheet has held up well so far – under pressure from the economy and its own aggressive strategy. Asset quality and capital remain in-line with peers (2% of domestic loans restructured, 9% Tier 1); and deposit franchise retains momentum (+38% yoy) and quality (41% CASA). International book though has seen sharp rise in
NPLs (1% slippage in 4Q) – potentially, an indicator of underlying stress.

To see full report: STATE BANK OF INDIA