State Bank of India Performance Highlights potx

Sign of improvement witnessed on the asset quality front, with decline in both gross and net NPA ratios on sequentially lower slippages, was the key positive from the result.. NIM decl

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Particulars (` cr) 4QFY12 3QFY12 % chg (qoq) 4QFY11 % chg (yoy)

Source: Company, Angel Research; Note:*write back on investments netted from treasury loss in 3QFY2012

During 4QFY2012, SBI’s reported standalone net profit of `4,050cr as against

`21cr in 4QFY2011, which was ahead of ours as well as street estimates Sign of

improvement witnessed on the asset quality front, with decline in both gross and net

NPA ratios on sequentially lower slippages, was the key positive from the result We

recommend a Buy on the stock with a target price of `2,486.

NIM decline by 16bp qoq; NPA ratios improves sequentially on reduced

slippages: During 4QFY2012, the bank’s net advances grew by 14.7% yoy driven by

healthy growth in segments such as International, Agricultural and SME Overall

deposits accretion remained moderate, registering a growth of 11.7% yoy The

reported domestic CASA ratio stood at 46.6% (47.9% in 3QFY2012 and 49.8% in

4QFY2011) The bank’s NIM contracted for both domestic (down by 11bp qoq to

4.28%) and foreign operations (down by 24bp qoq to 1.53%) Consequently, overall

NIMs for the bank contracted by 16bp to 3.89% The banks’ non-interest income

(excl treasury) grew strongly by 18.1% yoy mainly on account of healthy 13.0% yoy

growth in fee income On the asset-quality front, the bank’s annualized slippage ratio

for the quarter came at 2.3%, significantly lower than 4.3% in 3QFY2012 and 4.2%

in 2QFY2012 The NPA ratios improved sequentially with both gross and net NPA

levels decreasing on an absolute basis by 1.1% and 15.9%, respectively The PCR

(incl technical write-offs) also improved by 558bp qoq to 68.1% The bank

restructured accounts worth `5,134cr during 4QFY2012, which included Air India’s

`1,215cr, thereby taking its total restructured book to `42,744cr The slippages from

the restructured book during 4QFY2012 stood at `1,361cr

Outlook and valuation: At the CMP, the stock is trading at 1.2x FY2014E ABV

(adjusting for value of subsidiaries 1.1x FY2014E ABV) vis-à-vis its historic range

of 1.3–2.3x and median of 1.7x Also, considering the bank’s dominant position

and reach, high fee income, superior earnings quality and recent signs of

improvement in asset quality, we recommend a Buy on the stock with a target

price of `2,486

Key financials

BUY

Investment Period 12 Months

Sector Banking Market Cap (` cr) 134,706 Beta 1.2

52 Week High / Low 2530/1576 Avg Daily Volume 713,026 Face Value (`) 10

Nifty 4,906

Shareholding Pattern (%)

MF / Banks / Indian Fls 17.1

Indian Public / Others 9.9

Sensex (12.3) (11.9) 17.6 SBI (20.8) (16.4) 13.3

Vaibhav Agrawal

022 – 3935 7800 Ext: 6808 vaibhav.agrawal@angelbroking.com State Bank of India

Performance Highlights

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Exhibit 1: 4QFY2012 performance Particulars (` cr) 4QFY12 3QFY12 % chg (qoq) 4QFY11 % chg (yoy)

- on balance with RBI & others 102 107 (5.2) 87 16.8

Other income excl treasury 5,290 3,216 64.5 4,481 18.1

Provisions & Contingencies 3,140 3,277 (4.2) 4,157 (24.5)

- Provisions for NPAs 2,837 3,006 (5.6) 3,264 (13.1)

- Provisions for Std Assets 375 195 92.6 631 (40.6)

Effective Tax Rate (%) 37.3 32.8 451bp 98.9 (6165)bp

Exhibit 2: 4QFY2012 Actual vs Angel estimates

Source: Company, Angel Research

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Exhibit 3: 4QFY2012 performance analysis Particulars 4QFY12 3QFY12 % chg (qoq) 4QFY11 % chg (yoy)

Deposits (` cr) 1,043,647 1,000,965 4.3 933,933 11.7

Credit-to-Deposit Ratio (%) 83.1 84.5 (142)bp 81.0 210bp

Current deposits (` cr) 98,273 79,462 23.7 107,059 (8.2)

Saving deposits (` cr) 359,847 367,896 (2.2) 323,394 11.3

CASA deposits (` cr) 458,120 447,358 2.4 430,453 6.4

Reported dom CASA ratio (%) 46.6 47.9 (133)bp 49.8 (320)bp

Profitability Ratios (%)

Asset quality

Provision Coverage Ratio (%) 68.1 62.5 558bp 65.0 315bp

Advances growth moderate During 4QFY2012, the bank’s net advances grew by 14.7% yoy, driven by healthy 24.1% yoy growth in International loan book, 23.3% yoy growth in Agricultural advances and 16.3% yoy growth in SME loans Growth in retail advances was however lower at 10.8% yoy on account of relative slower yoy growth in home loans (14.3%) and education loans (13.2%) as compared to healthy growth of 20.9% in auto loans

The bank’s loan book continues to remain well diversified, with no segment accounting for more than 20% of the total loan book

Overall deposits accretion remained moderate during 4QFY2012, registering a growth of 11.7% yoy Domestic saving deposits growth was modest at 11.3% yoy which coupled with 8.2% yoy decline witnessed in volatile domestic current account deposits lead the domestic CASA deposits to grow at subdued pace of 6.4% yoy The reported domestic CASA ratio as of 4QFY2012 stood at 46.6% (47.9% in 3QFY2012 and 49.8% in 4QFY2011)

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Exhibit 4: Business growth moderates

Exhibit 5: CASA ratio declines

Exhibit 6: Segment-wise advances growth

Exhibit 7: Loan book remain well-diversified

Overall NIMs dip by 16bp sequentially The bank’s NIM contracted for both domestic (down by 11bp qoq to 4.28%) and foreign operations (down by 24bp qoq to 1.53%) Consequently, overall NIMs for the bank contracted by 16bp during the quarter to 3.89% Contraction of 11bp qoq in domestic NIMs was as a result of relatively higher sequential increase registered in domestic cost of deposits and borrowings compared to 12bp qoq increase witnessed in domestic yield on advances As of 4QFY2012, the banks’ the bulk deposits stand at a low of ~11% of the overall deposits book

Exhibit 8: Overall reported NIM dip by 16bp qoq

Exhibit 9: partly on sequentially higher domestic CoD

82.7

81.0 81.1 81.2

84.5

83.1

76.0 80.0 84.0 88.0

-5.0

10.0

15.0

20.0

25.0

3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12

Advances YoY growth (%) Deposits YoY growth (%)

24.2

18.8

6.4

12.0

6.4

-7.0 14.0 21.0 28.0

30.0 34.0 38.0 42.0 46.0 50.0 54.0

4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 Reported domestic CASA ratio (%) CASA yoy growth (%, RHS)

International 15%

Mid-Corporate 19%

Large Corporate 14%

SME 16%

Agricultural 13%

Retail 20%

Others 3%

3.07

4.05

3.89

2.00

2.50

3.00

3.50

4.00

4.50

(%)

5.26

5.66

4.8 5.0 5.2 5.4 5.6 5.8 6.0

(%)

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Healthy growth in fee Income and higher dividend income drive strong growth in non-interest income

During 4QFY2012, non-interest income (excl treasury) for the bank grew strongly

by 18.1% yoy to `5,290cr, mostly on account of healthy 13.0% yoy growth in fee income to `4,216cr, strong growth of 37.0% in forex income to `335cr and significantly higher dividend income at `515cr in 4QFY2012 as compared to

`163cr in 4QFY2011 However, treasury registered a loss of `26cr during the quarter as against profit of `335cr in 4QFY2011

Exhibit 10: Strong gr in non-int income driven by healthy gr in fee income Particulars (` cr) 4QFY12 3QFY12 % chg (qoq) 4QFY11 % chg (yoy)

Other income excl treasury 5,290 3,216 64.5 4,481 18.1

NPA ratios improve sequentially on reduced slippages

On the asset-quality front, the bank’s annualized slippage ratio for the quarter came at 2.3%, significantly lower than 4.3% witnessed in 3QFY2012 and 4.2% registered in 2QFY2012 Almost 90.1% slippages were witnessed in the Corporate, SME and Agri segments However on a sequential basis, slippages from both the segments- Corporate as well as SME- nearly halved to `2,417cr from `3,948cr and to `1,072cr from `2,078cr, respectively Decline in slippages from the Agri segment was relatively higher at 58.9% qoq to `462cr Even amongst the corporate and SME segments slippages, major industries witnessing sequentially higher slippages were infrastructure (`554cr vs `124cr in 3QFY2012) and textiles (`814cr vs `462cr in 3QFY2012)

The NPA ratios improved sequentially with both gross and net NPA levels decreasing on an absolute basis by 1.1% and 15.9% qoq, respectively As of 4QFY2012 gross NPA ratio stands at 4.4% (4.6% in 3QFY2012), while net NPA ratio stands at 1.8% (2.2% in 3QFY2012) The provisioning coverage ratio (incl technical write-offs) also improved by 558bp during 4QFY2012 to 68.1% The bank restructured accounts worth `5,134cr during 4QFY2012 which included Air India’s `1,215cr and took their total restructured book to `42,744cr The slippages from the restructured book during 4QFY2012 stood at `1,361cr

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Exhibit 11: Slippages decline on a sequential basis

Exhibit 12: NPA ratios improve sequentially

Exhibit 13: Break-up of provisioning expenses Particulars (` cr) 4QFY12 3QFY12 % chg (qoq) 4QFY11 % chg (yoy)

Cost ratios remained at normalized levels During the quarter, staff expenses increased by 8.8% yoy to `3,821cr, while other opex increased by 15.9% yoy to `2,420cr The bank added 325 branches during the quarter (645 during FY2012) to bolster its already strong branch network to 14,097 branches

Exhibit 14: Opex growth trends

Particulars (` cr) 4QFY12 3QFY12 % chg (qoq) 4QFY11 % chg (yoy)

Payment to employees 3,017 3,055 (1.3) 2,827 6.7

Contrib for employees 805 860 (6.4) 685 17.5

Total staff expenses (A) 3,821 3,914 (2.4) 3,512 8.8

Rent, taxes and lighting 508 529 (3.8) 436 16.5

Other opex (B) 2,420 2,461 (1.6) 2,088 15.9

Total opex (A)+(B) 6,242 6,375 (2.1) 5,599 11.5

Exhibit 15: Cost ratios remain at normalized levels

3.6 3.3 4.2 4.3 2.3

1.1

-0.3 0.6 0.9 1.2

-1.0

2.0

3.0

4.0

5.0

4QFY11 1QFY12 2QFY12 3QFY12 4QFY12

Slippages (%) Credit cost (%, RHS)

65.0

67.3

63.5

62.5

68.1

56.0 60.0 64.0 68.0 72.0

-1.0 2.0 3.0 4.0 5.0

4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 Gross NPAs (%) Net NPAs (%) NPA coverage (%, RHS)

2.3

1.9

2.1

2.0

2.2

1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4

-10.0 20.0 30.0 40.0 50.0 60.0

4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 Cost-to-income ratio (%) Opex to average assets (%, RHS)

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Performance overview of subsidiaries

SBI Life reported PAT of `556cr for FY2012, (growth of 52% yoy) The AUM as

of 4QFY2012 stood at `46,576cr as against `40,163cr in 4QFY2011

SBI Capital Markets registered a sharp 28% yoy decline in PAT to `251cr during FY2012, reflecting the poor capital market activity

SBI Cards and Payment Services posted PAT of `38cr for FY2012 as against

~`7cr in FY2011

SBI DFHI recorded PAT of `44cr (de-growth of 23% yoy)

SBI Funds Management’s average AUM as of 4QFY2012 stood at `42,042cr (`41,671 in 4QFY2011) The company recorded a PAT figure of `61cr for FY2012 (decline of 23% yoy)

The overall SBI Group recorded net profit of `5,234cr and `15,973cr, respectively during 4QFY2012 and entire FY2012

Investment arguments Strong CASA franchise SBI has a strong CASA franchise (45%+) on account of its huge nationwide branch network (14,097 as of FY2012) Even in FY2012, the bank domestic CASA ratio stood at 46.6%, highest amongst all other PSU banks

Strongest fee income among PSU banks SBI has a relatively strong share of fee income, owing to its strong corporate and government business relationships In FY2012, the bank continued its dominance with non-interest income/assets at 1.2% (highest among PSU banks)

Outlook and valuation

We expect SBI to outperform on account of its stronger core competitiveness and ample levers to deliver healthy operating income growth while managing its provisioning requirements At the CMP, the stock is trading at 1.2x FY2014E ABV (adjusting for value of subsidiaries 1.1x FY2014E ABV) vis-à-vis its historic range of 1.3–2.3x and median of 1.7x Also, considering the bank’s dominant position and reach, high fee income, superior earnings quality and recent signs of improvement

in asset quality, we recommend a Buy on the stock with a target price of `2,486

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Exhibit 16: SOTP valuation summary

Source: Angel Research

Exhibit 17: Key assumptions Particulars (%) Earlier estimates Revised estimates

FY2013 FY2014 FY2013 FY2014

Exhibit 18: Change in estimates Particulars (` cr)

Earlier estimates

Revised estimates Var (%)

Earlier estimates

Revised

estimates Var (%)

Net interest income 52,746 50,951 (3.4) 61,829 60,037 (2.9)

Non-interest income 16,822 17,973 6.8 19,616 20,528 4.6

Operating income 69,568 68,925 (0.9) 81,445 80,565 (1.1)

Operating expenses 29,802 30,240 1.5 34,272 35,078 2.4

Pre-prov profit 39,766 38,685 (2.7) 47,173 45,487 (3.6)

Provisions & cont 18,024 15,390 (14.6) 20,597 17,633 (14.4)

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Exhibit 19: P/ABV band

Exhibit 20: P/E band

Exhibit 21: Premium/Discount to Sensex

0 1,000 2,000 3,000 4,000 5,000

c- Jul-11

0 1,000 2,000 3,000 4,000 5,000

(60) (50) (40) (30) (20) (10)

0

10

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Exhibit 22: Angel EPS forecast vs consensus

Year Angel forecast Bloomberg consensus Var (%)

Source: Bloomberg, Angel Research

Exhibit 23: Recommendation summary

Company Reco CMP (`) Tgt price (`) Upside (%) P/ABV (x) FY2014E Tgt P/ABV (x) FY2014E FY2014E P/E (x) EPS CAGR (%) FY2012-14E FY2014E RoA (%) FY2014E RoE (%)

Source: Company, Angel Research; Note:*Target multiples=SOTP Target Price/ABV (including subsidiaries), # Without adjusting for SASF

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Income statement

Net Interest Income 20,873 23,671 32,526 43,291 50,951 60,037

- YoY Growth (%) 22.6 13.4 37.4 33.1 17.7 17.8

Other Income 12,691 14,968 15,825 15,221 17,973 20,528

- YoY Growth (%) 35.0 17.9 5.7 (3.8) 18.1 14.2

Operating Income 33,565 38,640 48,351 58,512 68,925 80,565

- YoY Growth (%) 27.0 15.1 25.1 21.0 17.8 16.9

Operating Expenses 15,649 20,319 23,015 26,069 30,240 35,078

- YoY Growth (%) 24.1 29.8 13.3 13.3 16.0 16.0

Pre - Provision Profit 17,916 18,321 25,336 32,443 38,685 45,487

- YoY Growth (%) 29.7 2.3 38.3 28.1 19.2 17.6

Prov & Cont 3,736 4,396 10,385 13,960 15,390 17,633

- YoY Growth (%) 10.8 17.7 136.2 34.4 10.2 14.6

Profit Before Tax 14,180 13,925 14,951 18,483 23,295 27,853

- YoY Growth (%) 35.8 (1.8) 7.4 23.6 26.0 19.6

Prov for Taxation 5,058 4,759 6,686 6,776 7,421 8,886

- as a % of PBT 35.7 34.2 44.7 36.7 31.9 31.9

- YoY Growth (%) 35.5 0.5 (9.8) 41.7 35.6 19.5

Balance sheet

Reserves & Surplus 57,313 65,314 64,351 83,280 96,045 111,200 Deposits 742,073 804,116 933,933 1,043,647 1,231,504 1,453,175

- Growth (%) 38.1 8.4 16.1 11.7 18.0 18.0

Borrowings 53,714 71,031 79,945 80,622 94,892 111,760 Tier 2 Capital 30,344 31,980 39,624 46,384 53,805 62,952 Other Liab & Prov 80,353 80,337 105,248 80,915 94,893 111,228 Total Liabilities 964,432 1,053,414 1,223,736 1,335,519 1,571,810 1,850,985 Cash balances 55,546 61,291 94,396 54,076 49,260 58,127 Bank balances 48,858 24,898 28,479 43,087 50,714 59,728 Investments 275,954 295,785 295,601 312,198 396,689 474,895 Advances 542,503 631,914 756,719 867,579 1,006,392 1,177,478

- Growth (%) 30.2 16.5 19.8 14.7 16.0 17.0

Other Assets 37,733 35,113 43,778 53,113 62,514 73,626 Total Assets 964,432 1,053,414 1,223,736 1,335,519 1,571,810 1,850,985

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