Weak as expected; remain positive over medium term February 12, 2016 Nitin Kumar nitinkumar@plindia.com +91 22 66322236 Pritesh Bumb priteshbumb@plindia.com +91 22 66322232 Rating BUY Price Rs154 Target Price Rs235 Implied Upside 52.6% Sensex 22,952 Nifty 6,976 (Prices as on February 11, 2016) Trading data Market Cap. (Rs bn) 1,197.5 Shares o/s (m) 7,763.7 3M Avg. Daily value (Rs m) 3505.5 Major shareholders Promoters 61.37% Foreign 10.37% Domestic Inst. 18.72% Public & Other 9.54% Stock Performance (%) 1M 6M 12M Absolute (24.5) (42.6) (46.1) Relative (17.0) (25.0) (26.5) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 20.3 25.5 20.6 2018 27.1 30.7 11.7 Price Performance (RIC: SBI.BO, BB: SBIN IN) (Rs) 350 300 250 200 150 100 50 0 Feb 15 Apr 15 Jun 15 Source: Bloomberg Aug 15 Oct 15 Dec 15 Feb 16 SBIN reported relatively better quarter with fresh slippages standing at Rs207bn (6.2% annualized, ~72% due to RBI AQR) thus leading to 95bp QoQ increase in GNPL ratio to 5.1%. Bank mentioned that it will implement RBI's AQR over two quarters and has guided for similar level of slippages in Q4FY16 but significant improvement from FY17 onwards. While the deterioration in asset quality is significant we believe that it will help take away the overhang of asset quality and SBI is still best positioned amongst PSUs to handle the ongoing developments and likely emerge stronger. We cut our estimates to factor in the current trends and lower our PT to Rs235 (from Rs350) 1.0x Sep 17E ABV. We maintain BUY & believe that the stock presents an attractive buying opportunity over the medium term. Total revenue grows 4% YoY: SBIN reported 4% YoY growth in total income led by 18% YoY growth in other income even as NII declined by 1.2% YoY due to interest reversals of RS4.5bn. Other income growth was driven by healthy capital gains of Rs12.35bn, excluding which the core fee income grew ~15% YoY. NII growth was aided by pick up in advances growth and buoyant CASA mix. Margins declined by 8bp QoQ (10bp QoQ in domestic business) due to higher reversals and we expect it to improve from Q1FY17E onwards. Slippages increased to RS207bn; ~70% due to RBI's AQR: Asset quality deteriorated with fresh slippages coming at Rs207bn (6.2% annualized) thus leading to 95bp QoQ increase in GNPL ratio and 75bp QoQ increase in NNPL ratio at 2.89%. O/s restructured assets declined by 9% QoQ to Rs485.9bn (3.5% of total loans) while standard exposure under SDR and 5/25 stands at RS122 bn and Rs110bn respectively. We note that the proportion of net stressed assets (details exhibit 1) for SBIN is lowest amongst large PSU banks at ~3% of total loans. SBIN sold loans worth RS3.95bn to ARC (O/s SRs: Rs56bn). Profitability likely to improve from FY17E; retain BUY : SBIN has aggressively cut base rate recently however we expect margins to sustain at around current levels as deposit portfolio re prices lower, more so in Q1FY17 while the extent of interest reversals will also decline. SBIN remains one of the well capitalized PSU bank and we expect earnings to gain traction from next fiscal. Maintain BUY with PT of Rs235 (from Rs350) based on SOTP valuation. Key financials ( Y/e March) 2015 2016E 2017E 2018E Net interest income 550,153 565,433 656,226 750,337 Growth (%) 11.6 2.8 16.1 14.3 Operating profit 389,135 409,626 488,013 569,939 PAT 131,016 107,448 157,402 210,530 EPS (Rs) 17.5 14.1 20.3 27.1 Growth (%) 15.3 (19.6) 43.7 33.8 Net DPS (Rs) 3.5 2.5 3.8 4.0 Profitability & Valuation 2015 2016E 2017E 2018E NIM (%) 2.87 2.61 2.68 2.65 RoAE (%) 10.6 7.9 10.4 12.7 RoAA (%) 0.68 0.50 0.64 0.74 P / BV (x) 0.9 0.8 0.8 0.7 P / ABV (x) 1.2 1.2 1.0 0.9 PE (x) 8.8 10.9 7.6 5.7 Net dividend yield (%) 2.3 1.6 2.4 2.6 Source: Company Data; PL Research Q3FY16 Result Update PrabhudasLilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Net stressed assets for SBIN lower than that of peers and accounts for only ~31% of projected networth Rs in million FY17E O/s standard restructured assets 510,269 of which SEB restructured 25,000 Exposure under SDR cases 142,363 Exposure under 5/25 158,470 ARC sale outstanding 81,000 Gross NPLs 867,389 Total Gross Stressed Assets 1,759,490 As % of FY17E Networth (excluding revaluation reserves) 111.7% As % of FY17E loans 10.9% Net stressed asset calculation 20% slippage from restructured assets (excluding SEB portion) 97,054 30% haircut on SDR cases 42,709 20% on 5/25 exposure 31,694 10% on ARC sale 8,100 70% of Net NPL 313,614 Total damage to Book Value 493,171 As % of FY17E Networth (excluding revaluation reserves) 31.3% As % of FY17E loans 3.0% Book Value per share, Rs 202.9 ABV per share adjusted for 70% Net NPLs, Rs ABV 1 148.7 ABV per share adjusted for all other exposure (SDR, 5/25, ARC & restr) ABV2 125.5 February 12, 2016 2
Exhibit 2: High slippages hit operating performance (Rs m) Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 QoQ gr. (%) Interest income 405,535 385,462 5.2 406,576 (0.3) Interest Expenses 269,470 247,695 8.8 264,050 2.1 Net interest income (NII) 136,065 137,766 (1.2) 142,526 (4.5) Treasury income 12,350 9,195 34.3 14,940 (17.3) Other income 61,775 52,378 17.9 61,973 (0.3) Total income 197,840 190,144 4.0 204,498 (3.3) Operating expenses 101,861 97,200 4.8 101,839 0.0 Staff expenses 61,226 58,420 4.8 61,421 (0.3) Other expenses 40,635 38,779 4.8 40,418 0.5 Operating profit 95,979 92,945 3.3 102,659 (6.5) Core operating profit 83,629 83,749 (0.1) 87,719 (4.7) Total provisions 79,494 52,349 51.9 43,606 82.3 Profit before tax 16,485 40,596 (59.4) 59,053 (72.1) Tax 5,332 11,495 (53.6) 20,262 (73.7) Profit after tax 11,153 29,101 (61.7) 38,791 (71.2) Balance sheet (Rs) Deposits 16,714,162 15,100,769 10.7 16,341,145 2.3 Advances 13,912,578 12,325,449 12.9 13,371,532 4.0 Gross NPL (Rs m) 727,917 619,915 17.4 568,343 28.1 Net NPL (Rs m) 402,491 344,687 16.8 285,920 40.8 Profitability ratios RoaA 0.2 0.6 (41) 0.8 (54) RoaE 9.7 11.1 (145) 12.6 (296) NIM 2.9 3.1 (19) 3.0 (8) Asset Quality Cum. Restruc. assets (Rs m) 712,000 667,040 6.7 709,820 0.3 Gross NPL ratio 5.1 4.9 20 4.2 95 Net NPL ratio 2.9 2.8 9 2.1 75 Coverage ratio 44.7 44.4 31 49.7 (499) Rest. Std. assets/ Total adv. 3.5 3.8 (28) 4.0 (50) Business & Other Ratios Low cost deposit mix 42.7 42.6 12 42.2 46 Cost income ratio 51.5 51.1 37 49.8 169 Non int. inc / total income 31.2 27.5 368 30.3 92 Credit deposit ratio 83.2 81.6 162 81.8 141 CAR 12.5 12.0 42 12.2 28 Tier I 9.6 9.4 26 9.9 (27) February 12, 2016 3
Exhibit 3: Advances growth picks up further, but bank remains selective in growth 21.0% 19.0% 17.0% 15.0% 13.0% 11.0% 9.0% 7.0% 5.0% 16.1% 18.9% 17.2% 15.6% 14.4% 14.7% Advances growth YoY(%) 20.5% 15.7% 19.0% 15.7% 17.5% 13.0% 9.7% 7.3% 7.5% 6.8% 10.5% 12.9% Exhibit 4: Business growth pick up mainly from large corporate book, retail & SME Loan break up (Rs mn) Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 QoQ gr. (%) Total Advances 14,284,950 12,654,830 12.9 13,707,010 4.2 Large 3,011,660 2,396,180 25.7 2,835,490 6.2 Mid 2,137,770 2,206,830 (3.1) 2,047,490 4.4 SME 1,819,220 1,579,420 15.2 1,765,720 3.0 Agri 1,211,020 1,595,370 (24.1) 1,184,190 2.3 International 2,657,020 2,246,730 18.3 2,658,170 (0.0) Retail 3,082,660 2,602,260 18.5 2,910,430 5.9 Home 1,796,830 1,529,050 17.5 1,708,990 5.1 Auto 371,190 307,010 20.9 340,940 8.9 Education 157,320 152,950 2.9 158,060 (0.5) Other retail 757,320 613,250 23.5 702,440 7.8 Exhibit 5: Global NIMs holding steady supported by domestic NIMs 4.4% NIM (%) Domestic NIM (%) 4.1% 3.8% 3.5% 3.2% 2.9% 2.6% 3.9% 3.7% 3.7% 3.6% 3.4% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.3% 3.3% 3.2% 3.6% 3.3% 3.4% 3.3% 3.2% 3.2% 3.2% 3.2% 3.1% 3.1% 3.1% 3.2% 3.0% 3.0% 2.9% February 12, 2016 4
Exhibit 6: Core fee growth remains weak mainly from lower loan processing fees & govt commissions Exhibit 7: CASA profile sees some further improvement but on back of slowing term deposit growth 40% 30% 20% 10% 0% Core fees growth YoY 50.0% 47.0% 44.0% 41.0% Low Cost deposits(%) 10% 38.0% 20% 35.0% Exhibit 8: Opex remained under check mainly on tight control in other expenses 35.0% Opex growth YoY 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 5.0% 4Q11 Exhibit 9: Fresh slippages contributed from large corporate (largely from RBI s AQR), while Mid corporate slippages continue to be high Opening 642,070 678,000 616,010 604,342 607,122 619,915 567,270 564,230 568,360 Additions 114,380 79,420 99,320 77,000 70,430 47,690 73,180 58,750 206,920 Upgradation + Recovery 27,680 84,430 45,470 26,350 6,670 51,610 27,030 15,210 10,370 Write offs 50,770 56,980 65,560 47,870 50,960 48,740 49,190 39,140 36,970 Closing 678,000 616,010 604,300 607,122 619,915 567,270 564,230 568,360 727,917 Slippages (%) annualized 4.06% 2.65% 3.21% 2.52% 2.33% 1.55% 2.25% 1.84% 6.19% Net slippages (%) annualized 0.98% 2.82% 1.47% 0.86% 0.40% 1.71% 0.09% 0.13% 4.77% February 12, 2016 5
Exhibit 10: Asset quality deteriorates sharply on highest ever slippages in single quarter Exhibit 11: Slippages ratio spike substantially on RBI s AQR and weakness in certain accounts 6.0% Gross NPA (%) Net NPA (%) 7.0% Gross Slippages (%), annualized 5.0% 4.0% 3.0% 2.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 1.0% Exhibit 12: We revise our TP for SBIN to Rs235/share from Rs350/share considering haircuts in stressed assets and is based on SOTP method, PT calculation and upside Fair price EVA 155 Fair price P/ABV 158 Average of the two 156 Value of subs/associates 78 Fair value of consol. entity 235 P/ABV 1.0 P/ABV2 adjusted for Net NPLs / SRs / slippages from restructured assets 1.2 P/E Standalone bank 6.6 Current price, Rs 154 Upside (%) 53% Dividend Yield (%) 2.6% Total Return 56% February 12, 2016 6
Exhibit 13: SBIN s: SOTP valuation table SOTP valuation, FY16E Multiple Stake (%) Revised PT Method Standalone 1.8 100 156 Avg. of P/ABV & EVA Subsidiary/associates 31 St Bk of Bikaner 1.2 75% 5 P/ABV St Bk of Hyderabad 1.3 100% 12 P/ABV St Bk of Mysore 1.0 92% 5 P/ABV St Bk of Patiala 0.9 100% 6 P/ABV St Bk of Travancore 0.9 75% 3 P/ABV Life insurance venture 12x 74% 23 Appraisal value; 12x new business multiple Asset management 63% 4 4.5% of AUMs Capital Market/DFHI/Others 100% 21 Total 235 Exhibit 14: Earnings Change Table We cut our estimates to factor in higher credit costs on asset quality issues, as well as tweak our business growth estimates (Rs mn) Old Revised % Change New FY16E FY17E FY16E FY17E FY16E FY17E FY18E Net interest income 602,121 679,129 565,433 656,226 (6.1) (3.4) 750,337 Operating profit 426,072 490,600 409,626 488,013 (3.9) (0.5) 569,939 Net profit 162,177 188,473 107,448 157,402 (33.7) (16.5) 210,530 EPS (Rs) 21.3 24.3 14.1 20.3 (33.7) (16.5) 27.1 ABVPS (Rs) 145 166 126 149 (12.9) (10.3) 178 Price target (Rs) 350 235 Recommendation BUY BUY (32.9) Exhibit 15: SBIN historical P/ABV trends P/ABV 5 yr avg. avg. + 1 SD avg. 1 SD 3.9 3.4 2.9 2.4 1.9 1.4 0.9 Feb 09 May 09 Aug 09 Nov 09 Feb 10 May 10 Aug 10 Nov 10 Feb 11 May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13 May 13 Aug 13 Nov 13 Feb 14 May 14 Aug 14 Nov 14 Feb 15 May 15 Aug 15 Nov 15 Feb 16 February 12, 2016 7
Income Statement (Rs m) Int. Earned from Adv. 1,123,439 1,171,688 1,301,068 1,484,715 Int. Earned from Invt. 370,878 428,984 488,666 549,326 Others 29,654 24,909 26,290 30,757 Total Interest Income 1,523,971 1,625,581 1,816,025 2,064,798 Interest expense 973,818 1,060,147 1,159,799 1,314,461 NII 550,153 565,433 656,226 750,337 Growth (%) 11.6 2.8 16.1 14.3 Treasury Income 36,180 57,889 92,622 148,195 NTNII 189,578 199,702 197,168 183,614 Non Interest Income 225,759 257,591 289,790 331,809 Total Income 1,749,730 1,883,172 2,105,815 2,396,607 Growth (%) 13.0 7.6 11.8 13.8 Operating Expense 386,776 413,398 458,003 512,207 Operating Profit 389,135 409,626 488,013 569,939 Growth (%) 21.2 5.3 19.1 16.8 NPA Provisions 168,636 238,425 228,258 229,777 Investment Provisions (5,901) (3,540) 2,124 (1,275) Total Provisions 195,995 246,826 249,525 250,953 PBT 193,140 162,801 238,488 318,986 Tax Provisions 62,124 55,352 81,086 108,455 Effective Tax Rate (%) 32.2 34.0 34.0 34.0 PAT 131,016 107,448 157,402 210,530 Growth (%) 20.3 (18.0) 46.5 33.8 Balance Sheet (Rs m) Par Value 1 1 1 1 No. of equity shares 7,467 7,764 7,764 7,764 Equity 7,467 7,764 7,764 7,764 Networth 1,284,383 1,452,026 1,575,589 1,750,026 Adj. Networth 1,008,477 925,033 1,127,569 1,389,899 Deposits 15,767,932 17,470,869 19,951,733 23,463,238 Growth (%) 13.1 10.8 14.2 17.6 Low Cost deposits 6,519,051 7,390,178 8,599,197 10,276,898 % of total deposits 41.3 42.3 43.1 43.8 Total Liabilities 20,480,799 22,827,957 26,099,445 30,603,085 Net Advances 13,000,264 14,248,289 16,186,057 19,164,291 Growth (%) 7.5 9.6 13.6 18.4 Investments 4,950,274 5,937,961 6,915,179 7,891,122 Total Assets 20,480,798 22,827,957 26,099,445 30,603,085. Quarterly Financials (Rs m) Y/e March Q4FY15 Q1FY16 Q2FY16 Q3FY16 Interest Income 401,012 396,429 406,576 405,535 Interest Expense 253,894 259,109 264,050 269,470 Net Interest Income 147,118 137,320 142,526 136,065 Non Interest Income 85,153 50,880 61,973 61,775 CEB 49,010 32,021 31,530 35,090 Treasury 16,590 8,724 14,940 12,350 Net Total Income 232,270 188,200 204,498 197,840 Operating Expenses 108,177 96,179 101,839 101,861 Employee Expenses 65,665 59,064 61,421 61,226 Other Expenses 42,511 37,115 40,418 40,635 Operating Profit 124,094 92,021 102,659 95,979 Core Operating Profit 107,504 83,297 87,719 83,629 Provisions 65,929 39,997 43,606 79,494 Loan loss provisions 64,680 37,547 44,328 78,196 Investment Depreciation (840) 1,800 (510) 260 Profit before tax 58,165 52,024 59,053 16,485 Tax 20,744 15,099 20,262 5,332 PAT before EO 37,420 36,924 38,791 11,153 Extraordinary item PAT 37,420 36,924 38,791 11,153 Key Ratios CMP (Rs) 154 154 154 154 Equity Shrs. Os. (m) 7,467 7,764 7,764 7,764 Market Cap (Rs m) 1,151,717 1,197,545 1,197,545 1,197,545 M/Cap to AUM (%) 5.6 5.2 4.6 3.9 EPS (Rs) 17.5 14.1 20.3 27.1 Book Value (Rs) 172 187 203 225 Adj. BV (100%) (Rs) 133 126 149 178 P/E (x) 8.8 10.9 7.6 5.7 P/BV (x) 0.9 0.8 0.8 0.7 P/ABV (x) 1.2 1.2 1.0 0.9 DPS (Rs) 3.5 2.5 3.8 4.0 Dividend Yield (%) 2.3 1.6 2.4 2.6 Profitability (%) NIM 2.9 2.6 2.7 2.6 RoAA 0.7 0.5 0.6 0.7 RoAE 10.6 7.9 10.4 12.7 Efficiency Cost Income Ratio (%) 49.8 50.2 48.4 47.3 C D Ratio (%) 82.4 81.6 81.1 81.7 Business per Emp. (Rs m) 132 139 151 169 Profit per Emp. (Rs lacs) 6.0 4.7 6.6 8.4 Business per Branch (Rs m) 1,648 1,622 1,680 1,802 Profit per Branch (Rs m) 8 5 7 9 Asset Quality Gross NPAs (Rs m) 567,253 897,833 867,389 814,529 Net NPAs (Rs m) 275,906 526,993 448,020 360,127 Gr. NPAs to Gross Adv. (%) 4.4 6.3 5.4 4.3 Net NPAs to Net Adv. (%) 2.1 3.7 2.8 1.9 NPA Coverage (%) 51.4 41.3 48.3 55.8. February 12, 2016 8
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