>STATE BANK OF INDIA (IIFL)

• NIM to be 2.6–2.75%: NIM expanded by 30bps QoQ during 3QFY10to 2.82%; adjusting for one-off tax benefit, it was 2.67%. The management expects NIM to be 2.6% for FY10 and improve further to 2.75% in FY11. Part of the margin expansion in FY11 would be driven by improvement in CASA ratio, which the management expects to improve to 46% by end-FY11 from 43% as at end- 3QFY10. The bank is seeing strong growth in savings bank deposits, and expects them to grow by 35%.

IIFL Conference key takeaways

• Strong fee income growth: The management expects non-interest income (ex-treasury) growth of 25-30% over the next two years, significantly ahead of the NII growth. The bank has diverse fee income sources, such as cash management, dealer financing, vendor financing and remittances of Indian Army. SBI group now accounts for about 65% of government business, which provides a good source of fee income.

• No material increase in employee expenses: Employee expenses rose sharply in 3QFY10 as the bank made provisions for wage revision and pension liability. However, going forward, the management does not expect any significant increase in employee expenses. The bank is likely to recruit about 10,000 employees every year for the next two years, while about 5,000-6,000 employees are expected to retire every year. Average cost of a retiring employee is about 2.5x of an incoming employee’s. Also, all the new hires will be part of defined-contribution pension plan, as against the defined benefit plans for all current employees.

• Low NPL coverage a concern: The bank needs to provide an additional Rs32bn to reach NPL coverage of 70% by September 2010 at the current gross NPL level. If NPL level rises, the bank will have to provide more. The bank expects to reach 65% NPL coverage by September 2010 and 70% by March 2011, based on its estimates of NPL slippage and provisions.

To read the full report: SBI