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SBI 3QFY2013 performance highlights and results update

Contributed by Angel Broking

SBI reported a subdued operating performance for 3QFY2013, as its NII and operating profit declined by 2.7% and 4.2% yoy, respectively, which was in-line with our estimates. Slippages came in elevated at 3.8%, leading to slightly higher-than-expected provisioning and a modest earnings growth of 4.1%.

Business growth healthy; Asset quality pain persists: During 3QFY2013, the bank’s advances grew by 16.1% yoy, while deposits registered a growth of 15.6% yoy. Growth in saving deposits was moderate at 11.7% yoy, while current deposits remained largely flat on a yoy basis. The domestic NIM were lower, on account of 12bp sequential fall in its yield on advances on back of aggressive pricing of loans in certain categories and interest reversals on increased slippages. The noninterest income (excluding treasury) remained flat on a yoy basis, largely aided by a strong growth of 54.1% yoy in forex income, even as fee income declined by  3.1% yoy. On the asset-quality front, the annualized slippage rate remained elevated at 3.8%, higher sequentially from 3.3% in 2QFY2013. Almost 73% of the incremental slippages came from the mid-corporate and SME segments. As per the Management, out of the slippages worth Rs.8,175cr during the quarter, an amount of Rs.1,500-2,000cr has been restructured already, which should reflect in higher recoveries/upgrades from NPAs in 4QFY2013. Recoveries/upgrades came in lower at Rs.2,797cr, compared to Rs.3,088 in 2QFY2013. Hence, on a sequential basis, gross NPA levels were higher by 8.6%, with net slippages being about Rs.800cr higher than our estimates. As a result, in spite of slightly higher provisioning expenses than estimated by us, provisioning coverage ratio declined by about 130bp sequentially and net NPA levels were higher sequentially by 12.2%, on an absolute basis. Additionally, the bank restructured advances worth ~Rs.2,800cr during the quarter, thereby taking its outstanding restructured book (restated after removing those accounts which have performed satisfactorily for two years) to Rs.34,783cr, of which Rs.23,845cr are standard restructured advances.

Outlook and valuation: The asset quality of the bank has been witnessing pressure for quite some time now, but going forward net slippages are expected to stabilize in line with peers, as the economic cycle gradually improves. However, at the current market price, the stock is trading at 1.4x FY2014E ABV (adjusting for value of subsidiaries 1.2x FY2014E ABV) vis-à-vis its historic range of 1.3–2.3x and median of 1.6x. Also, considering the bank’s dominant position and reach, high fee income and superior earnings quality, we recommend an Accumulate rating on the stock with a target price of Rs.2,597.