>STATE BANK OF INDIA (ICICI SECURITIES)

Exceeding expectations

State Bank of India’s (SBI) Q1FY10 net profits grew 42% YoY, higher than our expectations, driven by strong 45% YoY rise in core fee income growth and Rs12bn write-back of investment provisions. While NIMs remained under pressure (down 73bps YoY and ~15bps QoQ), this was in line with most banks that reported margin compression due to excess liquidity on the balance sheet. Pre-provisioning profits were down 7.3% YoY given higher operating expenses on the back of Rs6.3bn additional provision for wage revision. Asset quality remained manageable – Dabhol exposure of Rs16.5bn is now upgraded to standard restructured assets. Maintain HOLD. Prolonged margin compression and deterioration in asset quality are the key risks.

■ Balance sheet liquidity rises; NIMs under pressure. SBI’s advances grew 22.5% YoY, while deposits increased 35.9% YoY and ~2.9% QoQ. Excess liquidity deployed in low-yielding assets, BPLR cuts and slow deposits repricing led to compression in NIMs (down 73bps YoY) to 2.3%. NII increased 4.3% YoY (in line with our estimates). We estimate ~20bps YoY compression in NIMs in FY10E.

■ Robust other income growth; one-time items buoy costs. Other income increased a healthy 48.5% YoY driven by Rs7.1bn trading profits (Rs2.23bn in Q1FY09). Growth in other income (ex-treasury) was healthy at 31.1% YoY. Operating expenses grew 51% YoY, primarily driven by one-time wage provisions of Rs6.29bn owing to increase in estimated liability for wage revision and pension provisions of Rs4.29bn in Q1FY10.

■ Asset quality controlled; no surprises on restructured assets. SBI marginally improved its asset quality with GNPAs & NNPAs improving 5bps QoQ & 21bps QoQ to 2.79% & 1.55% respectively. SBI’s restructured assets were at Rs81.18bn, with Rs16.5bn exposure to Dabhol being a part of the standard restructured assets in Q1FY10. Total outstanding restructured assets, including loans ordinarily restructures, are at Rs211.5bn (3.85% of gross advances). Provisions declined 88.9% YoY due to Rs12bn write-back in investment depreciation. Provision
coverage ratio improved to 45.2% QoQ in Q1FY10 from 38.72% in Q4FY09.

■ Healthy performance by subsidiaries; maintain HOLD. SBI Group’s consolidated net profit grew an impressive 68.11% YoY. We marginally adjust earnings to account for traction in core-fee income and write-back of investment depreciation. But margin pressure is likely to keep RoE subdued at 16% through FY11E. At the current market price, the stock trades at FY11E P/E & P/BV of 6.9x & 1.1x. Prolonged NIM compression and sharp deterioration in NPA are key risks.

To see full report: SBI