subject: Religare maintains Buy on SBI [print this page] Religare maintains Buy on SBI
Religare has recommended `Buy` on SBI (State Bank of India) with a price target of Rs 3,700 as against the market price (CMP) of Rs 3,425 in its report dated Nov. 08, 2010. The brokerage house gave the following investment rationale:
NIMs improve to 3.3%; advances growth muted: The bank`s NIMs improved by 12 bps QoQ as yield on advances increased 20 bps QoQ and cost of deposits declined 2 bps QoQ (due to strong traction in CASA). The management remains confident of sustaining/improving NIMs in H2FY11, driven by a hike in PLR and base rate and strong traction in CASA. Advances growth was muted at 14-15% YoY (adj. for the SBI Indore merger) as credit off take remained subdued. Slippages remain high: During Q2FY11, SBIN reported an incremental addition of Rs 52.7 billion to its gross NPA; however, Rs 8.6 billion came in from the SBI Indore merger. Adjusted for this, slippages remained at 3% (same as last quarter) due to higher delinquencies in restructured assets and mid-corporate/SME segments. The bank reported slippages of Rs 6.6 billion from restructured assets (under the RBI scheme), taking the total slippages from this segment to 14.5% at Q2FY11-end.
Robust growth in fee income; costs up: Other income grew by 14% YoY despite a sharp decline in trading profits (Rs 2bn in Q2FY11 as against Rs 5.5 billion in Q2FY10) due to a strong 40% growth in core fee income. However, the increase in operating expenses (34% YoY, 19% QoQ) was higher-than-estimated due to (1) salary hikes and increase in DAs (2) provisions made towards gratuity and pensions (incremental provision of Rs 3 billion made towards gratuity) (3) ATM interchange fees paid to other banks (4) addition of new employees.
NII growth strong due to improvement in NIMs, advances growth subdued: During Q2FY11, SBIN`s advances grew by 19% YoY; however, this also included the advances of State Bank of Indore. Adjusted for this, growth was subdued at 14-15% only (as against 20% for the industry). Deposits grew only by 11% YoY as the bank continued to run down its excess liquidity. CASA growth remained strong at 29% YoY, maintaining the CASA proportion at 48% in Q2FY11 (up 680bps YoY). NIMs improved by 12bps QoQ (up 75bps YoY) to 3.3% as the yield on advances increased by 20bps QoQ to 9.5% and cost ofdeposits dipped 2bps (due to strong CASA growth). As per the management, NIMs are likely to remain stable at 3.3% or improve marginally in H2FY11 due to an increase in the PLR and base rate. For the full year, NIMs are likely to improve by 55bps on a lower base of FY10. We are revising our advances growth estimates to 19% (from 21% earlier) to factor in the subdued growth in H1FY11; however, our NII estimates for FY11 are revised upwards due to better-than-expected NIMs.
Core fee income strong at 40% YoY: SBIN`s total non-interest income grew only by 14% YoY during the quarter; however, this was primarily due to a sharp decline in trading profits (Rs 2 billion in Q2FY11 as against Rs 5.5 billion in Q2FY10). However, growth in core fee income was strong at 40% YoY due to higher commission generated from government business, loan processing and upfront fees, LC/BG and cross selling of products.
Premium valuations to sustain - `Buy`: SBIN has outperformed the Bankex and Sensex in the last six months (stock up 55% as against 43%/ 26% for Bankex/ Sensex). While the recent disappointing results are likely to put some pressure in the near term, we remain positive on SBIN from a long term perspective as its core operating performance is improving and its franchise remains strong. While slippages could remain high in the next few quarters, we believe that asset quality would improve in FY12 as slippages trend down and recoveries improve in line with the economic growth.
We therefore maintain a `Buy` on the stock with a target price of Rs 3,700 that comprises Rs 2,958 for the parent and Rs 742 for associate and other ventures (after ascribing a 15% holding company discount). SBIN has been contemplating to raise its core tier I capital to tap into the strong growth in credit off take over the next few years and partly to fund the capital requirements of associate banks and subsidiaries (not currently factored into our estimates). While we are not factoring dilution into our estimates, we note that an issuance of Rs 200 billion in FY11 would cause our FY12 BV to rise to Rs 1,545/sh and ROE to drop to 17%.
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