>STATE BANK OF INDIA: Bank booked INR1.1bn loss in treasury largely from the equity book

3QFY12 earnings came in at IN 32.6bn, in line with our estimates. NIM surprised positively yet again, only to be offset against higher loan loss provisions. The stock ended Monday (13 February) 2% below its previous day’s close.


Highlights: Core operating performance continues to remain strong for SBI with the loan book growing higher than system supported by robust and improving margins (4.05%), which were largely domestic driven (4.4%) and contained operating costs. The Bank booked INR1.1bn loss in treasury largely from the equity book, but also wrote back investment depreciation of INR8.7 bn. Although asset quality continued to disappoint with high slippages of c4% (INR81.6bn) and weak recoveries, the bank continued to grow its advances aggressively, largely in the agri and corporate segment. The corporate and SME segments continued to witness higher slippages with their GPNLs now 5.5% and 7.9%, respectively, while agri NPLs worsened further to c9.5%. Overall, GNPLs and NNPLs increased to 4.6% and 2.2%, respectively, while credit costs remained high at 145bps. Key sectors that witnessed slippages were iron and steel, one large account in aviation, textiles and agriculture. Restructured loans have also increased with the gross book now at 4.7% of loans and slippages at 26%.


Outlook: We believe margins will continue to aid SBI in providing for higher credit costs. However, it seems much of this margin improvement is driven by growth in riskier loan segments like SME and agriculture. We remain cautious on asset quality and adjust our estimates for FY12, FY13 and FY14, maintaining our overall cautious outlook. Downgrade to UW (from N), target price remains at INR2,000: SBI currently trades at 12- month forward multiples of 10.9x PE and 1.6x PB against its average five-year multiples of 13x PE and 1.8x PB. The stock has risen by 14% since the 2QFY12 results, largely due to a liquidity-driven rally in January. Fundamentally, however, there has been little improvement in the outlook and concerns on asset quality remain with lower earnings’ visibility. SBI continues to trade at 40% premium to PE and 30% premium to PB over its PSU peers, despite its lower RoE (15%) and RoA (0.8%). We therefore, maintain our target multiples at 9.3x PE and 1.4x PB, implying a 58% and 40% premium on PE and PB to peers, respectively. Key upside risks: Upturn in economic cycle; asset quality improves.


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