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Spark Capital: State Bank of India 2QFY14 Result Review - Asset quality, profitability overhangs remain: Maintain SELL




Spark Capital Advisors(India) Private Limited


14 Nov 2013





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State Bank of India 2QFY14 Result Review - Asset quality, profitability overhangs remain: Maintain SELL State Bank of India’s (SBIN) 2QFY14 result was marked by a continued drop in profitability led by rising opex, lacklustre NIMs and core fee income which coupled with investment diminution and asset quality related provisioning led to a 35% yoy drop in PAT. Slippages for the quarter were at 3.2% (annualized), inclusive of incremental restructuring stressed asset formation stood at Rs. 170bn vis-à-vis Rs. 183bn in 1QFY14, putting in perspective the continued deterioration in asset quality. Asset quality stress in the mid-corporate and SME segments continued - together accounting for 71% of incremental slippages; continued slippages of ~2% in the large corporate (70% of which is rated A/AA/AAA) and an agri loan segment erodes confidence on asset quality bottoming out. The standard restructured stock currently amounts to 3.6% of the loan book, while slippages on the FY12 restructured book are at 40% - much ahead of the 21% slippage number on the cumulative restructured pool. Stressed assets are at a disturbing 12% for textiles, 16% for iron & steel and 14% for engineering adding to concerns of a 42% yoy growth in power. We also view management commentary on a further Rs. 60bn of restructured loans in the pipeline as a significant indicator of continuing asset quality deterioration. As indicated in our 4QFY13 result update the key risks we had indicated - downside risks to margins led by sticky retail deposit rates, higher opex in FY14 in view of higher life expectancy related pension costs, the impending bipartite settlement and static core fee income streams came to the fore during the quarter. Given our discomfiture with the bank’s asset quality, we continue to remain negative on the stock and retain a SELL with a target price of Rs. 1372 valuing the standalone bank at 1.0X FY15EABV and subsidiaries at Rs 377/share. Margins improved 9bps qoq (down 23bps yoy) led by a 27bps increase in the YoA, higher than a 19bps increase in the CoF. Core fee income was up a modest 6.8% yoy led by a 10% yoy decline in loan processing fees while a sharp 53% yoy decline in forex income surprised negatively. Although business growth was strong as advances and deposits grew qoq by 4% and 2.8% respectively, we remain skeptical of SBI’s continuing rise in infra, iron & steel and textile advances; these sectors accounted for 30% of incremental credit growth over FY13, inexplicable given the stressed asset formation in these sectors. As indicated earlier, the projected quantum of restructuring during FY14 (Rs. 190bn) is likely to surpass the Rs.168bn witnessed in FY13, meaning slippages from the restructured pool will remain high well into FY14.

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