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Recommendations India

State Bank of India 3QFY2014 performance highlights and results update

February 19, 2014, Wednesday, 10:11 GMT | 05:11 EST | 14:41 IST | 17:11 SGT
Contributed by Angel Broking

State Bank of India (SBI) reported a weak performance for 3QFY2014, both on the operating as well as on the asset quality front. Key highlights of the results were 1) Net slippages (slippages adjusted for recoveries/upgrades) ahead of our and street’s expectations at Rs.8,670cr as against around Rs.4,601cr in 2QFY2014, while restructuring came in lower sequentially at Rs.6,165cr vs. around Rs.9,306cr in 2QFY2014. 2) Opex grew by 31.4% yoy, on expected lines, on back of higher retirement benefits provisioning and wage revision provisioning. 3) Provisioning expenses grew 55.5% yoy (NPA provisions up 23.9% yoy), thereby leading to 34.2% yoy de-growth in overall earnings to Rs.2,234cr.

Business growth healthy; Domestic margins up 2bp qoq: During 3QFY2014, the bank’s business growth remained healthy, with advances growing at 17.6% yoy and deposits at 16.7% yoy. CASA deposits increased 12.5% yoy, aided by 13.4% yoy growth in saving deposits, even as current deposits grew moderate at 8.1% yoy. Domestic NIM improved 2bp qoq to 3.49% on back of 8bp qoq improvement in Yield on Advances to 10.4%. International NIMs remained largely stable at 1.5%. Non-interest income (excl. treasury) for the bank witnessed a healthy performance with 23.2% yoy increase to Rs.3,952cr, aided by fee income and forex gains. On the asset quality front, the bank faced pressures as net slippages (slippages adjusted for recoveries/upgrades) for the bank came much ahead of our and the street’s expectations. Higher net slippages resulted in 15.6% sequential increase in net NPAs. Write offs at Rs.5,077cr during the quarter largely restricted further increase in net NPAs. Gross and Net NPA ratios were higher by 9bp and 33bp qoq respectively to 5.7% and 3.2%. PCR dipped 184bp qoq (317bp yoy) to 58.3%. Mid-corporate and SME segment slippages contributed the bulk of the slippages (~80%) during 3QFY2014, as annualised slippage ratio for Mid-corporate segment came in at 13.6% during 3QFY2014. Restructuring during the quarter was broadly in-line with the Management guidance given post 2QFY2014 results.

Outlook and valuation: The bank has witnessed elevated asset quality pressure for quite some time now. Given the weak macro environment, we remain cautious on the incremental asset quality pressures for the bank. The bank’s core strength has been its high CASA and fee income, which has supported its core profitability in the current challenging times. Its strong capital adequacy also provides comfort. In our view, its current valuation of 0.7x FY2015E ABV, after adjusting for subsidiaries over discounts the negatives for the bank. While we continue to believe that the economic turnaround story can be better played with large private banks, still investors with higher risk appetite can invest in banks like SBI which have strong capital adequacy and structurally strong core profitability). We recommend a Buy rating on the stock with a target price of Rs.1,848.