Reviews & Tips :SBI
State Bank of India
Price target: Rs2,460
Current market price: Rs2,104
Results largely inline; negative surprise on asset quality
Result highlights
For Q2FY2010 State Bank of India (SBI) reported a net profit of Rs2,490 crore, indicating a growth of 10.2% year on year (yoy). This was slightly above our estimate (Rs2,378 crore) primarily driven by a better than expected net interest income (NII) growth and a spike in treasury gains.
The NII for the quarter came in at Rs5,608.8 crore, up 2.8% yoy. This lay above our expectation of Rs5207.4 crore. The higher than expected NII was on account of a healthy growth in the advances (up 17.6% yoy) coupled with a 25-basis-point sequential expansion in the reported net interest margin (NIM) to 2.55%.
The non-interest income for the quarter jumped up by 50.4% yoy to Rs3,525.2 crore on the back of an over two-fold jump in the treasury income coupled with a healthy growth in the ?commissions, exchange and brokerage? income (up 58% yoy).
The provisions and contingencies for Q2FY2010 grew by 66.4% yoy to Rs1,016.1 crore. The jump, despite the largely stable loan loss provisions, can be traced to the significant write-back of investment depreciation in the year-ago quarter. However, due to the growth in absolute gross non-performing assets (GNPAs) outpacing the growth in the loan loss provisions on a year-on-year (y-o-y) basis, the provision coverage for the bank deteriorated by 127 basis points yoy to 42.9%.
In Q2FY2010, SBI?s advances grew by a strong 17.6% yoy to Rs580,237 crore on the back of a robust growth in car loans (up 44.45% yoy) and education loans (up 42.23% yoy). International advances and home loans too grew at a healthy pace displaying growth rates of over 20% each. The domestic deposits grew much faster (up 24.7% yoy), implying an over 450-basis-point contraction in the deployment rate though the deployment picked up sequentially.
SBI's asset quality deteriorated further on an absolute basis during the quarter. At the gross level, the non-performing assets (NPAs) increased by 46.7% yoy and by 13.4% quarter on quarter (qoq) to Rs17,375 crore and at the net level to Rs9,927.3 crore (up 18.1% qoq). On a relative basis as well the %GNPAs increased by 28 basis points qoq to 2.99% and %NNPAs (% net NPAs) increased by 18 basis points to 1.73%. During Q2FY2010, the bank restructured assets worth Rs2,832 crore, taking the total count of the restructured assets to Rs17,376 crore. Of the restructured assets, Rs285 crore slipped into the NPA category.
SBI?s capital adequacy ratio (CAR) improved to 14.11% as on September 30, 2009 with the tier-I capital adequacy at 9.84%. During the quarter, the bank raised perpetual debt instruments of Rs1,000 crore, which is reckoned as tier-I capital.
We maintain our estimates and await clarity on provisioning norms from the regulator. At the current market price of Rs2,104, the stock trades at 11.5x FY2011E earnings per share (EPS), 5.4x FY2011E pre-provisioning profit (PPP), 1.8x FY2011E stand-alone book value (BV) and 1.4x F2011E consolidated BV. We maintain our Buy recommendation and price target of Rs2,460 on the stock with increase in provisioning requirements (to 70%) as a key risk to our investment thesis.