21 May 2012

4QFY12 Results Update | Sector: Financials

State Bank of India

BSE SENSEX

16,153

S&P CNX

4,891

CMP: INR1,942

TP: INR2,725

Buy

Bloomberg

SBIN IN

Equity Shares (m)

671.0

52-Week Range (INR) 2,530/1,576

1,6,12 Rel.Perf.(%)

-8/14/-7

M.Cap. (INR b)

1,303.2

M.Cap. (USD b)

23.9

* Valuation multiples are adjusted for SBI Life's value

State Bank of India (SBIN) has posted a PAT of INR40.5b for 4QFY12, which is 19% higher than our estimate and an

all-time high quarterly profit. NII grew 45% YoY on a low base, while fee income grew 13% YoY – a positive

surprise. Strong improvement in asset quality was the highlight of the quarter.



Unlike its peers, SBIN’s asset quality improved QoQ, as net slippages were a negative INR3.4b – a big positive.

Fall in slippages across segments is comforting. SBIN prudently increased its PCR (including technical write-

offs) to 68% v/s 62% in 3QFY12.



In 4QFY12, fresh loans of INR51.3b (60bp of loans) were restructured, of which INR12b were on account of Air

India. Net of Air India, standard restructured loans stood at 3.5%, one of the lowest among PSBs.



Global margins declined 16bp QoQ to 3.9%, led by 11bp QoQ fall in domestic margins to 4.3% and 24bp QoQ

decline in international margins to 1.5%.



Gross loans grew 16% YoY and 3% QoQ, while deposits grew 12% YoY and 3% QoQ. Overall CD ratio moderated

to 83.1% from 84.5% in 3QFY12. CASA growth moderated to 6% YoY, led by CA declining 8% YoY. Reported CASA

ratio stood at 46.6% v/s 47.5% in 3QFY12.

Valuation and view:

We expect SBIN’s healthy margin performance to continue on the back of benefits related to

reduction in CRR and recent equity infusion. Sharp sequential decline in gross slippages across segments in

4QFY12 is comforting. Though we conservatively build in higher credit costs, earnings CAGR is likely to remain

strong at 25% over FY12-14. Continuous improvement in asset quality could lead to earnings upgrade.

Buy.

Alpesh Mehta

(Alpesh.Mehta@MotilalOswal.com) + 91 22 3982 5415

Sohail Halai

(Sohail.Halai@motilaloswal.com)+ 91223982 5430

State Bank of India

Quarterly performance v/s our estimates and reasons for deviation (INR m)

Y/E March

Net Interest Income

% Change (YoY)

Other Income

Net Income

Operating Expenses

Operating Profit

% Change (YoY)

Other Provisions

Profit Before Tax

Tax Provisions

Net Profit

% Change (YoY)

4QFY12A

117,038

45

52,640

169,678

73,710

95,968

58

31,404

64,564

24,061

40,503

N.A.

4QFY12E

122,005

51

42,736

164,741

79,564

85,177

40

32,433

52,744

18,586

34,158

N.A.

Var. (%)

-4

23

3

-7

13

-3

22

29

19

Comments

Margin decline 16bp QoQ

Strong fee income growth

Lower NII off-set by fee income and control over opex

Strong asset quality performance; PCR improves 550bp QoQ

Strong fee income growth, control over opex and improvement

in asset quality drives PAT

Source: Company/MOSL

Strong performance on asset quality; net slippages a negative INR3.4b – a

positive surprise

Gross slippages declined significantly to INR43.4b from INR81.6b in 3QFY12, whereas

net slippages were negative at INR3.4b (v/s +INR6.2b in 3QFY12) – a key positive. The

annualized slippage ratio for 4QFY12 stood at 2.3% v/s 4.5% for 3QFY12 and 4% for

9MFY12. Recoveries and upgradations stood at INR47.2b v/s INR19.7b in 3QFY12 and

INR26.7b in 4QFY11. While it was partially driven by restructuring of one large account

(INR7.7b), earlier classified as NPA; strong performance in retail segment was the

major reason for higher recoveries and upgradations during the quarter.

Fresh slippages during the quarter declined QoQ across segments, with sharp fall in

slippages in (1) corporate segment (post three quarters of sequential increase) to

INR24.1b v/s INR39.5b in 3Q, (2) SME segment to INR10.7b v/s INR20.8b in 3Q, (3)

agriculture segment to INR4.6b v/s INR11.2b in 3Q, and (4) international segment to

INR160m v/s INR6b in 3Q. Slippages in the retail segment increased marginally QoQ

to INR4.2b. Of the overall slippages during the quarter, the textile segment constituted

INR8.1b (~18% of incremental slippages), infrastructure INR5.5b and iron and steel

INR4.2b.

GNPAs flat QoQ; PCR (including technical write-offs) improves to 68.1%

In absolute terms, GNPAs stood at INR397b (flat QoQ) whereas NNPAs were at INR158b

(down 16% QoQ). In percentage terms, GNPAs stood at 4.4% (down 17bp QoQ) and

NNPAs were 1.8% (down 40bp QoQ). Despite healthy asset quality, the management

choose not to write-back any excess provisions, leading to PCR (calculated) improving

significantly to 60% v/s 53% in 3QFY12. PCR including technical write-offs stood at

68.1% (v/s 62.5% in 3QFY12).

Restructured INR51.3b (60bp) during the quarter; net of Air India, standard

restructured loans at 3.5% – one of the lowest among PSBs

During the quarter, SBIN restructured fresh loans worth INR51.3b. Of the overall loans

restructured during the quarter, Air India alone accounted for INR12b. Further, one

large account of INR7.4b from the textiles segment and another account worth INR7.7b

(which it had already classified as non-performing) were restructured. Net

restructured loan book stood at INR372b (net of repayment) – 4.3% of overall loans,

21 May 2012

2

State Bank of India

whereas net standard restructured loans stood at INR312b (3.6% of loan book) – one

of lowest amongst peers. The highest contributor to net restructured loans is the

textiles segment (INR74b; 20% of net restructured loans), followed by iron and steel

(INR31b; ~8% of net restructured loans).

Margins declined 16bp QoQ from an elevated level

NII grew 2% QoQ and 45% YoY to INR122b, 4% below estimate. Reported margins

declined 16bp QoQ to 3.9%, led by 11bp fall in domestic margins to 4.3% and 24bp

decline in international margins to 1.5%. Global margins stood at 3.85% in FY12, 3.84%

in 9MFY12 and 3.3% in FY11.

Strong fee income growth – a positive surprise; opex 7% below estimate

Non-interest income for the quarter was INR52.6b (v/s our estimate of INR42.7b). The

sharp deviation in non-interest income was largely on account of strong growth in fee

income (+13% YoY), led by 104% YoY growth in transaction fees (INR7.1b v/s INR3.5b)

and 38% YoY growth in fees from government business. In FY12, fee income grew 4%

v/s flat growth in 9MFY12. After muted fee income performance over past few

quarters, pick-up in fee income in 4QFY12 across segments is a key positive.

Contribution from sale of investments was negligible during the quarter v/s gains of

INR3.3b in 4QFY11. Forex income stood at INR3.3b as against INR2.8b in 3QFY12 and

INR2.5b in 4QFY11. Dividend income was INR4b as against nil in 3QFY12 and INR1.6b in

4QFY11. Opex was 7% below estimate and stood at INR73.7b. During the quarter, the

bank re-classified perquisites relating to travelling expense and leave travel allowance

to employee expense from other expense, leading to 30% QoQ increase in employee

expense and 11% QoQ decline in other opex. SBIN also revised its discounting factor

assumption for pension calculation to 8.75% as against 8.5% earlier, which also would

have led to lower provisioning requirement, in our view.

Loan growth in line with industry average; domestic CD ratio stable QoQ

Gross loans grew 3% QoQ (+16% YoY), while deposits were up 4% QoQ (+12% YoY). In

line with overall loan growth, domestic loans grew 3% QoQ and 14% YoY to INR7.6t.

On domestic operations, CD ratio remained largely stable QoQ at 78.5%. Sequential

growth in domestic loan book was driven by agriculture (+15% QoQ and 23% YoY) and

SME (+~5% QoQ and 16% YoY) segments. The large corporate segment grew 1.5% QoQ

and 15% YoY, whereas retail loans grew 4% and 11% YoY. For FY13, the management

has guided loan growth of 16-18%. However, a challenging macroeconomic

environment and slowdown in fresh capex remain the key risks.

Performance of banking subsidiaries: Asset quality improves QoQ; loan

growth remains healthy

SBI’s subsidiary banks reported earnings growth of 38% QoQ (flat YoY) to INR12.7b

for 4QFY12. Strong non-interest income growth (+40% QoQ; though down 3% YoY)

and flat provisions QoQ led to strong sequential earnings growth. For FY12,

subsidiaries reported a flat PAT of INR36.2b.



NII grew 7% QoQ and 14% YoY to INR32b in 4QFY12, and grew 10% in FY12.



3

21 May 2012

State Bank of India

Loan growth remained above industry average at 9% QoQ and 21% YoY to INR2.9t.



Asset quality improved sequentially, with GNPAs (in absolute terms) declining

3% QoQ and NNPAs declining 7% QoQ. In percentage terms, GNPAs declined 35bp+

QoQ to 2.95% and NNPAs declined 25bp+ QoQ to 1.5%. PCR improved marginally

to 48.3% from 46.2% in 3Q.



Valuation and view

Outlook on NIM:

CASA mix of 47%+, shedding of high cost bulk deposits (now just 11%

of overall deposits) and re-pricing of loans have led to strong margin performance in

FY12. Global NIM improved significantly to 3.85% from 3.3% in FY11, against a declining

trend for its peers. Though there was some pressure on margins in 4QFY12, reduction

in CRR (INR130b liquidity release, benefit of ~10bp on NIM) and equity infusion of

INR79b (benefit of ~7bp on NIM) will keep margins strong in 1HFY13. Nevertheless, a

challenging loan and CASA growth environment, coupled with moral suasion from

GoI will keep yield on loans and cost of funds under pressure. We model 15bp margin

decline in FY13.

Outlook on asset quality:

Higher slippages in 9MFY12 had been a concern for SBIN.

However, sharp fall in gross slippages during the quarter (INR43b v/s INR81b in 3QFY12

and INR225b in 9MFY12) across segments provides comfort. Further, performance on

recoveries and upgradations improved significantly, leading to negative net slippages

and improvement in asset quality. Considering the challenging macroeconomic

environment, net slippages are likely to be higher. We factor in gross slippage ratio of

3% over FY13-14 v/s 3.6% in FY12. Our credit cost estimates are conservative at 1.15%

for FY13 and 1% for FY14 v/s 1.4% (1.15% excluding one-offs) for FY12. Continuous

improvement in asset quality could lead to earnings upgrade.

Restructured standard loan book

(ex Air India) at INR300b (3.5% of loan book) is the

lowest among peers, which also provides comfort on asset quality. Excluding Air India

and SEBs, peer banks’ outstanding net restructured loans remain in the range of 4-5%

of loan book.

Chunk of fees linked to transaction banking:

Fee income has risen in the last two

quarters and continuous traction in fees accompanied by lower base in FY12 will lead

to fee income CAGR of 15% over FY13-14. Based on the improved disclosure on fee

income, ~55% of fees are either linked to transaction banking or are liability customer

related fees, which are unlikely to be impacted due to slowdown in loan growth.

Loan processing fees, which form 23% of fee income, have already de-grown 10% in

FY12, and given the lower base, are unlikely to be a drag on overall fees.

Earnings CAGR of 25%:

One-off provisioning (~INR23.7b) and loss (MTM and realised)

on investments (INR15.8b) led to a drag on earnings in FY12 (20% of FY12 PBT). Lower

base coupled with largely stable margins and improving fee income should lead to

earnings CAGR of 25% over FY12-14.

21 May 2012

4

State Bank of India

Valuations attractive; our top pick:

We estimate standalone (consolidated) RoE at

17.2% (17.6%) for FY13 and 17.9% (18.1%) for FY14. RoA is likely to improve from 0.9%

in FY12 to 1.1%+ (1%) over FY13-14. The stock trades at 1x FY13E consolidated BV of

INR1,819 and 0.9x FY14E consolidated BV of INR2,099. SBIN remains our top pick, with

a target price of INR2,725 (1.25x FY14E consolidated BV + INR102/share for Insurance).

Our target multiples would see further upside, as the macroeconomic environment

and interest rate outlook improves.

We upgrade our earnings est to factor in strong fee income and lower credit cost (INR b)

Old Estimates

FY13

FY14

485

543

167

191

652

733

313

353

339

381

127

115

212

266

76

96

136

170

3.6

3.4

1.2

0.9

0.9

1.0

15.7

17.3

Rev. Estimates

FY13

FY14

474

525

181

206

655

731

295

327

359

405

118

121

242

283

87

99

155

184

3.6

3.4

1.2

1.0

1.1

1.1

17.2

17.9

Change (%)

FY13

FY14

-2.2

-3.2

8.1

8.0

0.4

-0.3

-5.8

-7.4

6.2

6.3

-7.0

5.8

14.1

6.6

14.1

3.6

14.1

8.2

Net Interest Income

Other Income

Total Income

Operating Expenses

Operating Profits

Provisions

PBT

Tax

PAT

Margins (%)

Credit Cost (%)

RoA (%)

RoE (%)

Source: MOSL

State Bank: One year forward P/E

State Bank: One year forward P/BV

21 May 2012

5

State Bank of India

Quarterly trends

Loan growth moderates...

…as does deposit growth



The management has guided 16-18% loan growth for FY13



Shedding of high cost deposits leading to moderation in

deposit growth

Domestic CD ratio remains stable QoQ (%)

CASA ratio declines marginally QoQ (%)



Domestic CD ratio remains at an optimal level



Current deposit growth moderates, leading to moderation

in CASA ratio

Margins decline QoQ (%)

Net investment gains remain negative



Margins declined 16bp QoQ, led by 11bp QoQ fall in domestic



Net investment gains continued to be negative for the

margins and 24bp decline in international margins

fourth consecutive quarter

21 May 2012

6

State Bank of India

Quarterly trends (Contd.)

Fee income growth surprises positively

Cost to core income remains stable QoQ (%)



Fee income grew 13% YoY, led by strong traction in



Controlled opex led to stable cost to income ratio

transaction fees (up 104% YoY)

Slippages decline sharply QoQ

Traction in upgradations and recoveries improves considerably



Steep sequential decline in slippages across segments



Even after excluding one large account, recoveries and

has been comforting

upgradations have gained momentum

GNPAs decline QoQ

Lower slippages, improved PCR led to lower NNPAs



Net negative slippages led to QoQ decline in GNPAs



Provision coverage ratio (including technical write-offs)

improved to 68.1% from 62.5% leading to lower NNPAs

21 May 2012

7

State Bank of India

Quarterly Snapshot

1Q

2Q

FY11

3Q

4Q

1Q

2Q

FY12

3Q

4Q

Variation (%)

QoQ

YoY

2

154

N.M.

60

17

213

25

16

30

-11

32

30

33

51

24

-1

-16

-17

-40

702

558

-46

-218

-6

-15

Cumulative Numbers

FY11

FY12 YoYGr (%)

33

-10

N.M.

5

-2

-10

19

13

20

1

25

26

24

1

42

Profit and Loss (INR m)

Net Interest Income

73,038 81,149 90,498 80,581 96,995 104,817 115,188 117,038

Other Income

36,900 40,052 33,139 48,155 35,342 34,272 20,730 52,640

Trading profits

1,734 1,927 2,202 3,347 1,689

281 -10,904

-263

Fee Income

24,096 29,450 24,774 37,312 26,329 26,003 26,415 42,161

Forex Income

5,025 3,090 4,083 2,446 3,312 4,806 2,855 3,348

Others

6,045 5,586 2,080 5,050 4,012 3,182 2,363 7,394

Total Income

109,938 121,201 123,637 128,735 132,338 139,090 135,918 169,678

Operating Expenses

48,593 57,631 55,992 67,938 59,913 63,749 63,318 73,710

Employee

30,739 36,758 35,117 44,611 37,174 43,444 41,633 54,310

Others

17,854 20,873 20,876 23,327 22,740 20,305 21,685 19,400

Operating Profits

61,345 63,570 67,645 60,797 72,424 75,341 72,600 95,968

Provisions

15,514 26,215 20,515 41,570 41,569 33,855 24,074 31,404

PBT

45,831 37,355 47,130 19,227 30,855 41,486 48,526 64,564

Taxes

16,688 12,342 18,849 19,019 15,020 12,784 15,895 24,061

PAT

29,143 25,014 28,281

209 15,836 28,702 32,630 40,503

Asset Quality (INR b)

GNPA

208

232

234

253

278

339

401

397

NNPA

111

116

117

123

124

161

188

158

GNPA (%)

3.1

3.4

3.2

3.3

3.5

4.2

4.6

4.4

NNPA (%)

1.7

1.7

1.6

1.6

1.6

2.0

2.2

1.8

PCR (Calculated, %)

47

50

50

51

55

53

53

60

PCR (Reported, %)

61

63

64

65

67

64

63

68

Slippages

41

53

32

56

61

83

82

44

Slippage Ratio (%)

3.0

3.7

2.1

3.6

3.7

4.9

4.5

2.3

Prov. for NPA in qtr

17

22

16

33

28

29

30

28

Credit Cost (%)

1.1

1.3

0.9

1.8

1.5

1.5

1.5

1.3

Ratios (%)

Fees to Total Income

21.9

24.3

20.0

29.0

19.9

18.7

19.4

24.8

Cost to Core Income

44.9

48.3

46.1

54.2

45.9

45.9

43.1

43.4

Tax Rate

36.4

33.0

40.0

98.9

48.7

30.8

32.8

37.3

Loan/Deposit

80.1

79.6

82.7

81.0

81.1

81.2

84.5

83.1

Domestic Loan/Deposit 74.9

74.7

77.2

76.3

76.7

75.8

78.6

78.5

CAR

13.5

13.2

13.2

12.0

11.6

11.4

11.6

13.9

Tier I

9.8

9.6

9.6

7.8

7.6

7.5

7.6

9.8

RoA (cal)

1.1

0.9

1.0

0.0

0.5

0.9

1.0

1.2

RoE (Cal)

17.3

14.2

15.4

0.1

9.6

16.7

17.9

20.3

Margins (%)

Yield on Advances

9.3

9.5

9.6

9.6

10.4

10.8

10.9

11.1

Yield On Funds

6.8

6.9

7.0

7.0

7.2

7.3

7.5

7.5

Cost of Deposits

5.3

5.3

5.2

5.3

5.7

5.8

5.9

6.0

Quarterly margins

3.2

3.4

3.6

3.1

3.6

3.8

4.1

3.9

NIM Cumulative

3.2

3.3

3.4

3.3

3.6

3.7

3.8

3.9

For %age change QoQ and YoY is bp

45 325,265 434,039

9 158,246 142,985

N.M. 9,210 -9,197

13 115,632 120,909

37 14,644 14,322

46 18,760 16,952

32 483,511 577,024

8 230,154 260,690

22 147,225 176,560

-17 82,929 84,130

58 253,357 316,334

-24 103,813 130,902

N.M. 149,543 185,431

27 66,897 67,760

N.M. 82,646 117,671

57

28

116

19

888

315

-22

-126

-13

-44

23.9

52.2

44.7

21.0

47.0

36.5

12

-2

5

-16

1

149

49

69

82

53

Source: Company/MOSL

21 May 2012

8

State Bank of India

Quarterly Snapshot

INR b

1Q

2Q

4Q

1Q

2Q

1Q

4Q

Balance Sheet

Capital

6

6

6

6

6

6

6

6

6

6

6

7

6

6

Reserves & Surplus

612

638

659

653

682

716

744

644

659

700

747

833

12

29

Net Worth

618

644

666

659

689

722

750

650

666

706

753

840

11

29

Deposits

7,636 7,729 7,710 8,041 8,153 8,553 8,790 9,339 9,501 9,732 10,010 10,436

4

12

Domestic

7,324 7,384 7,362 7,647 7,624 8,078 8,334 8,872 8,999 9,173 9,414 9,822

4

11

Overseas

311

345

348

394

529

476

456

468

502

559

595

614

3

31

Borrowings

518

575

566 1,030 1,072 1,126 1,161 1,196 1,214 1,158 1,242 1,270

2

6

Other Liabilities & Prov.

998

930 1,057

803

837

643

813 1,052 1,095

829 1,010

809

-20

-23

Total Liabilities

9,770 9,878 9,999 10,534 10,750 11,045 11,514 12,237 12,475 12,425 13,014 13,355

3

9

Assets

Cash/RBI

405

417

447

613

467

671

807

944

916

750

719

541

-25

-43

Short term funds

291

282

269

349

333

348

316

285

340

185

212

431

103

51

Investments

3,202 3,085 2,881 2,858 3,000 2,855 2,700 2,956 3,014 3,015 3,016 3,017

0

2

Loans

5,498 5,721 5,989 6,319 6,532 6,807 7,266 7,567 7,709 7,906 8,463 8,676

3

15

Deposit Break-up

CASA Deposits

2,678 2,953 3,067 3,466 3,624 3,772 3,938 4,305 4,304 4,350 4,474 4,581

2

6

Savings Deposits

2,122 2,312 2,453 2,563 2,840 3,045 3,186 3,234 3,444 3,524 3,679 3,598

-2

11

% to Total Deposits

28

30

32

32

35

36

36

35

36

36

37

34 -227

-15

Current Deposits

637

641

628

903

784

791

752 1,071

860

826

795

983

24

-8

% to Total Deposits

8

8

8

11

10

9

9

11

9

8

8

9

148 -205

CASA (Cal)

36

38

40

43

44

45

45

46

45

45

45

44

-80 -219

CASA Reported

38

41

43

47

48

48

49

49

48

48

48

47

-88 -202

Domestic Loan Break Up

Large Corporate

638

650

825

881

956

931 1,058 1,087 1,141 1,133 1,231 1,250

2

15

Mid Corporate

1,273 1,219 1,120 1,337 1,312 1,449 1,486 1,576 1,596 1,613 1,661 1,676

1

6

SME

967

959 1,029

975

993 1,122 1,094 1,197 1,203 1,260 1,327 1,392

5

16

Agriculture

567

590

612

783

760

695

870

948

955

958 1,019 1,169

15

23

Retail

1,129 1,189 1,265 1,348 1,403 1,430 1,567 1,646 1,651 1,688 1,753 1,824

4

11

Others

22

248

283

120

163

251

219

171

228

200

363

267

-26

57

Domestic Loan Mix

Large Corporate

14

13

16

16

17

16

17

16

17

17

17

16

Mid Corporate

28

25

22

25

23

25

24

24

24

24

23

22

SME

21

20

20

18

18

19

17

18

18

18

18

18

Agriculture

12

12

12

14

14

12

14

14

14

14

14

15

Retail

25

24

25

25

25

24

25

25

24

25

24

24

Others

0

5

6

2

3

4

3

3

3

3

5

4

* There has been reclassification of loan in 4QFY11

Source: Company/MOSL

FY10

3Q

FY11

3Q

4Q

FY12

2Q

3Q

Variation (%)

QoQ

YoY

21 May 2012

9

State Bank of India

Stock Info

EPS: MOSL forecast v/s consensus (Standalone, INR)

MOSL

Forecast

230.6

274.5

Consensus

Forecast

218.4

260.7

Variation

(%)

5.6

5.3

1-year Sensex rebased

FY13

FY14

Shareholding pattern (%)

Promoter

Domestic Inst

Foreign

Others

Mar-12

61.6

17.1

11.4

9.9

Dec-11

59.4

18.7

10.9

11.0

Mar-11

59.4

16.6

15.8

8.3

21 May 2012

10

State Bank of India

Financials and Valuation

21 May 2012

11

State Bank of India

Financials and Valuation

21 May 2012

12

State Bank of India

N O T E S

21 May 2012

13

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State Bank of India

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