Tuesday, September 11, 2012

>STATE BANK OF INDIA: Striving to maintain market share in retail space

 Retail lending rate cut: SBI had cut its lending rates in its retail portfolio such as Home loans (upto Rs30 lakh) by 25bp to 10.25% and Auto loans by 50bp to 10.75%. SBI’s rate cut followed the RBI’s decision to decrease the Statutory Liquidity Ratio (SLR i.e. the amount of deposits that have to be invested in government bonds and other liquid assets), by 100bp to 23%. The 100bp reduction in the SLR has freed additional Rs10,000cr for SBI, coupled with Rs6,500cr released through the reduction in export refinance, which led the bank to cut lending rates in retail.

 Striving to retain market share amidst increasing competition in retail: The Indian economy has been witnessing a slowdown with receding capex loan pipeline, and hence, majority of the banks are increasing their lending portfolio in retail segment, since the consumption story in India remains robust. For instance, the
gross bank credit for scheduled commercial banks as on June 29, 2012 has increased 3% since March 23, 2012 to ~Rs45 lakh crore, however, the retail sector grew by 4.1% to ~Rs8 lakh crore during the same period. Considering SBI’s strong distribution network with access to cheaper deposits, the bank has
one of the lowest costs of funds as compared to some other peer group banks. Hence, in anticipation of increasing competition in the retail space, due to drying term loan demand, SBI cut its retail rates to maintain the market share in home loans (~26%) and auto segment (~18%). SBI had cut lending rates by 50-350bp
(earlier in June 2012) across various categories of borrowers such as SME and agriculture segments. The bank had also reduced the tenor premium on term loans by 40-100bp. We believe that the margins should be maintained at 3.8% for FY2013 considering the CRR and SLR cut.

 Asset quality issues: GNPAs in absolute terms increased 69.8% yoy and 18.9% qoq to Rs47,156cr, whereas, NNPAs increased 63.4% yoy and 28.5% qoq to Rs20,324cr as on 1QFY2013. Gross slippages increased by 2.5x sequentially to Rs10,844cr on the back of higher stress in Mid-corporate and SME sectors. Management has guided for Rs3,000-4,000cr by way of recoveries and upgradations. Cumulatively, the restructured book stood at Rs36,904cr out of which 20% has slipped into NPA.

Outlook and Valuation
Given the monsoon deficit in the country and the prevailing stress in the overall economy, we forecast continued asset quality pressure on SBI (at least for another 2-3 quarters). The bank reported its worst asset quality numbers with unprecedented rise in slippages in 1QFY2013. At the CMP of Rs1,845, the stock is trading at 1.1x its FY2014E standalone ABV (after adjusting for its associate banks and non-banking subsidiaries). We maintain our Buy recommendation (based on SOTP methodology) on SBI with a target price of Rs2,142.

To read report in detail: SBI