>STATE BANK OF INDIA: Tough times for subsidiaries

■ Earnings growth muted in FY2012; expect continued pressure on RoA and RoEs
SBI subsidiaries reported a weak performance on earnings (flat yoy) due to higher credit costs (up 10 bps), lower NIM (down 15 bps) and weak non-interest income. We expect earnings of 11% CAGR over FY2012-14 factoring slower loan growth (14% CAGR), weak non-interest income to continue (11% CAGR) and high credit costs of 24% CAGR (dynamic provisions). RoA and RoEs would continue to remain under pressure in the medium term (RoAs at 0.8-0.9% and RoEs at 14-15%).


■ A challenging year for asset quality; coverage ratio declines
FY2012 was one of the most challenging years for SBI’s banking subsidiaries in recent times as about 8% of loans either slipped into NPLs or had to be restructured (4% each). Overall gross NPLs increased 100 bps to 3% and net NPLs increased 100 bps to 2% of net loans. Transition-related issues seem to have created most of the impact on NPLs. Loan-loss provisions remained high at 1.1% and the NPV sacrifice was marginally higher at 4% of restructured loans. Coverage ratios declined due to higher slippages and write-offs.


■ Well capitalized for now; dilution needed in a few subsidiaries
A combination of lower RWA growth and capital infusion resulted in tier-1 ratio improving by 100 bps to 9% with core tier-1 ratio at 8.5%. Select subsidiaries would need additional capital in the medium term but we see limited risk, especially considering slower balance sheet growth, towards transition of these banks under the new Basel-3 guidelines.


■ Lower retirement benefits aid better cost management
Cost ratios were broadly stable in FY2012 at 45% with select banks reporting a decline in staff
costs. Importantly, the shortfall between pension assets/liabilities declined to 3% of net worth
against 10% in FY2011. We broadly expect cost ratios to remain closer to current levels factoring the impact of new wage agreement.


To read report  in detail: SBI
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