Wednesday, May 23, 2012

>STATE BANK OF INDIA: Surprise Victory over NPAs

India’s largest bank took the street by surprise by reporting asset quality which was much better than expectations. Key factors which helped the bank to report strong performance in Q4 were:

■ Strong focus on recoveries and better risk management helped in curtailing slippages to 2.3% vs. 4.5% in Q3.

 NPA provision declined 13% YoY and 6% QoQ to Rs 28.4 bn. However, the bank provided Rs 13 bn on certain NPAs which led to increase in provision coverage ratio to 60% (68% including technical write off) from 53% a quarter ago.

 Restructured book at 4.1% of advances saw addition of ~Rs 51 bn, which was lower than expectation.

 Management guided for lower slippage of ~Rs 20 bn in Q1FY13 along with marginal addition to restructured book.

 The bank abstained from high cost bulk deposits (~11% of advances), which supported NIM at 3.8%.

 Tax rate declined to 36% vs. 44% in FY11. Management indicated 34% tax rate in FY13.

Q4 highlights: Q4 PAT at Rs 40.5 bn, was above our estimate of Rs 37.5 bn led by strong other income growth (up 148% QoQ), which is usually lumpy in Q4. Business growth was muted at 13% YoY due to lower deposit growth at 12% YoY.

Maintain BUY with TP of Rs 2,324 – upside of 15%
We expect SBI to now focus on growth, as recovery mechanism is in place. However, we maintain our growth estimate at 15% and slippages at 2.7% for FY13 as the operating environment remains challenging. Maintain BUY with TP of Rs 2,324 [1.4 x FY14E ABV of Rs 1,331 (adj. for value and cost of invt) + Rs 461 value of invt].

To read report in detail: SBI