Stock market Result Update on State Bank of India for 1QFY2012

Stock market Result Update on State Bank of India for 1QFY2012 with a Buy recommendation and a Target Price of `2753 (12 months).

For 1QFY2012, SBI’s standalone net profit declined by 45.7% yoy due to higher NPA as well as investment provisioning burden. Results on the PBT level were ~14% above our estimates; however, the bottom line was dented by high effective tax rate of 48.7%. Strong sequential expansion in NIM was the key positive highlight of the results. NII was well above our as well as street’s expectations. However, fee income growth was rather muted and slippages remained elevated. We maintain our Buy recommendation on the stock.

NIM surprises positively; asset quality continues to disappoint: During 1QFY2012, the bank’s business momentum moderated in-line with peers; net advances grew by 1.9% qoq (18.0% yoy) and deposits rose by 1.7% qoq (16.5% yoy). Growth in agricultural loans (25.7% yoy), mid-corporate loans (21.7% yoy) and SME loans (21.2% yoy) was healthy. Saving account deposits accretion was strong at 6.5% qoq (21.3% yoy), driving the 18.8% yoy increase in CASA deposits. CASA ratio stood healthy at 47.9%. The bank surprised positively by reporting a strong 55bp qoq expansion in reported NIM, driven by an 87bp qoq rise in yield on advances as compared to a 40bp qoq increase in cost of deposits. Re-pricing of higher cost deposits contracted in FY2009 and income tax refund of ~`130cr also aided the margin expansion. The bank continued to disappoint on the asset-quality front, with the annualised gross slippages ratio remaining elevated at 3.3% (2.6% in 1QFY2011). Consequently, gross NPA ratio increased to 3.5% from 3.3% in 4QFY2011; however, net NPA ratio was stable sequentially at 1.61%. The bank’s capital adequacy profile continues to be weak with tier-I CAR of 7.6%; however, management appeared confident of raising tier-I capital in FY2012 itself.

Outlook and valuation: The stock is trading at 1.4x FY2013E ABV (adjusting for value of subsidiaries). In our view, the present valuations provide a good entry point considering that the earnings growth outlook (42% EPS CAGR over FY2011–13E) is strong due to lower regulatory provisioning burden, going forward. Hence, we maintain our Buy view with a target price of `2,753.