State Bank Of India - Bouncing Back Again

Over the past one year, State Bank of India, the country’s premier public sector bank, has emerged strongly from its slump and a spate of problems to register thumping profits. Vidrum Mehta tells us more.

Key Points:

• SBI’s March 2011 quarter numbers came in as a major disappointment, but exactly a year later, it showed a remarkable improvement in its March 2012 quarter numbers.
• The bank has shown remarkable improvement in its asset quality, with its Gross NPAs and the Net NPAs decreasing on a sequential basis.
• With the government infusing Rs 7900 crore as capital and with the help of internal accruals, SBI’s capital adequacy ratio (CAR) has improved and stands at 13.86 per cent as on March 31, 2012.

It has been almost a year since the top management of India’s largest bank underwent a change. On April 7, 2011, Pratip Chaudhuri was given the charge of leading State Bank of India (SBI) as its Chairman. Chaudhuri joined SBI 37 years ago as a probationary officer, and has now reached the top position. After his elevation to the top, SBI has been on the radar of investors, who have been keenly watching his moves in steering the bank forward.

The first major announcement that the bank made after Chaudhuri took over as Chairman was that of the March 2011 quarter numbers, which came in as a major disappointment. On a standalone basis, the bank had posted a meagre net profit, down 99 per cent to Rs 21 crore on the back of higher provisioning of Rs 4156 crore. On the day of the result, the scrip tanked almost eight per cent. However, exactly a year later, the bank showed a remarkable improvement in its March 2012 quarter numbers, resulting in the share price inching up by almost five per cent on the day the results were declared.

In the last one year, a series of news items have kept the bank in the limelight. From Moody’s downgrading its financial strength rating, to its exposure to Kingfisher Airlines and the lack of clarity on capital infusion, a host of factors have plagued the SBI stock. All of these put together impacted the stock so badly that it lost its status as the most valuable financial company (albeit for a brief period) to HDFC Bank. With this, the scrip took a beating and declined almost 42 per cent in CY2011.

In 2012 though, it has recovered smartly to appreciate by around 24 per cent. The bank has posted robust numbers for the March 2012 quarter, which has caught our attention. Here, we present an analysis of the results of the bank for the March 2012 quarter, which should provide a sense of where the stock is headed.

On a standalone basis for the March 2012 quarter, SBI’s Net Interest Income increased by 44 per cent to Rs 11591 crore on a YoY basis. The bank posted a net profit of Rs 4050 crore against an estimate of Rs 3580 crore. For the same quarter last year, the bank had posted a meager profit Rs 21 crore, mainly due to the higher provisioning. Hence, comparing its bottomline with that of the corresponding quarter last year would not give us a fair idea. However, a comparison of other key financial parameters should tell us about the bank’s financial position.

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Asset Quality

Asset quality is a serious issue that most banks are currently facing. However, SBI has shown an improvement on the asset quality front, which is commendable. Its Gross NPAs decreased by 17 basis points to 4.44 per cent, while the Net NPAs decreased by 40 basis points to 1.82 per cent on a sequential basis. It should be remembered that SBI had the burden of having among the worst asset qualities in the industry in its December 2011 quarter results. The improvement from there on reflects the bank’s genuine attempts to reduce its NPAs.

For the full year considered, the bank has witnessed a substantial movement in its NPAs. The Net Increase in NPAs in FY12 was Rs 14350 crore. A rise in its NPAs pushed up its Provision Coverage Ratio (PCR) by 315 basis points to 68.1 per cent on a YoY basis, which is just below the RBI’s comfort level of 70 per cent. This essentially means that SBI has substantially covered its NPAs and will probably not see any further deterioration in the quality of its assets going forward.

With the government infusing Rs 7900 crore as capital and with the help of internal accruals, SBI’s capital adequacy ratio (CAR) has improved and stands at a good level. As on March 31, 2012, its CAR stood at 13.86 per cent, with the Tier 1 CAR standing at 9.79 per cent, well above the government’s comfort level of eight per cent for FY12.

One should note that in 2011, leading global rating agency, Moody’s, had downgraded its financial strength rating from C- to D+ on account of asset quality concerns and a low capital adequacy ratio. With an improvement on both these counts, there could be a possibility of a re-rating for the bank.

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Net Interest Margin (NIM)

The bank’s Net Interest Margin (NIM) has also shown an improvement. For the March 2012 quarter, its NIM increased by 82 basis points to 3.89 per cent on a YoY basis. However, the domestic NIM for FY12 increased to 4.17 per cent from 3.63 per cent last year. This is one of the best in the industry.

Business Growth

As on March 31, 2012, SBI’s deposits increased by 11.75 per cent to Rs 1043647 crore, while its advances increased by 15.78 per cent to Rs 893613 crore. The CASA ratio decreased by 318 basis points to 46.64 per cent, largely on account of negative growth in the current account deposits and muted growth in the saving deposits. Further, on the credit front, the management expects corporate disbursements to remain subdued while the retail loan book continues to show decent strength. The management has also guided that business growth for the bank would be challenging in FY13.

The Year That Was

Now, let’s take a look at the bank’s full year performance for 2011-12 on a consolidated basis. Its Net Interest Income (NII) increased by 27 per cent to Rs 57877 crore, while the net profit increased by 43 per cent to Rs 15343 crore. Some of its non-banking leadsubsidiaries also posted decent numbers, which include SBI Life Insurance Company (PAT of Rs 556 crore, 52 per cent YoY growth), SBI Cards and Payment Services (PAT of Rs 38 crore, 443 per cent YoY growth) and others like others like SBI Capital Markets (PAT of Rs 251 crore, negative growth of 28 per cent).

The board has recommended a dividend of Rs 35 per share for the year ending March 31, 2012, and hence, the dividend yield comes out to be around 1.75 per cent. Overall, the bank has posted a good set of numbers, which boosted the market sentiment for the stock. According to the management guidance, the NIM will improve going forward, while business growth would remain challenging, as already stated.

Valuations

On the valuations front, SBI is available at a price to book value (P/BV) of around 1.65x, which is fair considering the size of the bank. We, at DSIJ, had recommended SBI in Vol. 27, Issue No. 5, (dated 26th February, 2012), and continue to believe that the bank will perform well going ahead. With the interest rates reversing, its NIM is expected to improve going ahead. The bank has shown a decline in its NPAs. On the capital front, it has received infusion from the government, which will help it going ahead.

We hold that SBI will continue to grow and create wealth for investors, keeping a longer term horizon in mind.