Moneycontrol
May 19, 2017 05:38 PM IST | Source: Moneycontrol.com

SBI Q4 result is a stellar show amid myriad headwinds

The mother ship of the Indian banking industry is navigating very well in turbulent waters. That’s what we conclude after looking at a very decent set of fourth quarter numbers from State Bank of India.

SBI Q4 result is a stellar show amid myriad headwinds

Madhuchanda Dey

Moneycontrol Research

The mother ship of the Indian banking industry is navigating very well in turbulent waters. That’s what we conclude after looking at a very decent set of fourth quarter numbers from State Bank of India.

While the headline print is somewhat distorted due to the Asset Quality Review of the year-ago quarter, there are several positive takeaways from the numbers nevertheless.

Exhibit_3_Chart32017

 

The healthy growth in net interest income (the difference between interest income and expenses) by over 17 percent was aided by over 7 percent growth in advances and only a marginal decline in net interest margin. Margin, nevertheless, witnessed a small uptick sequentially.

Other income was somewhat stagnant on a year-on-year basis, but the control on costs as reflected in the lower cost-to-income ratio drove the greater-than-12 percent growth in operating profit.

Finally, the lower provision compared to the year-ago quarter resulted in significant jump in the headline profitability number.

What did we like in the result?

The resumption of growth, coupled with the ability to improve margins, was comforting. Not only did advances grow by 7.3 percent annually, thereby outperforming the system credit growth of 5.1 percent, the sequential growth of 8.5 percent shows the lender is also grabbing market share from public sector peers who are severely weighed down by asset quality woes. Overall credit growth including corporate bonds and commercial paper stood at a healthy 14 percent.

The composition suggests a diversified book with a 24-percent share of the retail portfolio. The bank has disclosed that 84 percent of the new relationships are either PSUs or corporates rated above A, thereby pointing to a well-managed and less risky business model, going forward.

The performance on the margin front – a slight improvement sequentially -- has come about owing to lower cost of funds. While the demonetisation-led rush had a positive impact on rates in the previous quarter, the bank appears to have retained some of those gains as reflected in the stable CASA (low cost deposits) ratio of 45.6 percent.

The bank has improved its share in domestic deposits as well as advances.

A deep dive into the profile of fee income suggests that the retail component of fees (close to 78 percent) is growing at a much faster pace and stable sources like cross-selling and fees on locker rent etc. are compensating for the subdued performance on corporate fees.

Asset quality – positive takeaways

Finally, the number that the Street was eagerly awaiting – the slippage in the quarter, didn’t disappoint either. While it was more or less flat sequentially, there were several details in the fine print to draw comfort from.

 

Exhibit_1_Chart12017_newFirstly, the bank has maintained a healthy coverage ratio at 66 percent (including write-off) was an improvement over the 61 percent that it had at the end of the previous fiscal.

Secondly, the absolute slippage in the year at Rs 43,374 crore was lower than what it reported in the previous fiscal at Rs 64,198 crore. Incidentally, 72 percent of the corporate slippages for the year and 70 percent of the corporate slippage for the quarter was from the watch list. The total stress including restructured, SDR and S4A stood at 10 percent, an addition of 3 percent over its reported gross NPA number.

Incidentally, the quantum of the watch list (after adding the share of associates that got merged) stood at Rs 32,427 crore (1.6 percent of advances) lower than the standalone watch list last year of Rs 34,776 crore (2.3 percent of advances). Even if we assume that 70 percent of the same slips into NPA over the course of FY18 – at Rs 22699 crore, the slippage will show a substantial reduction compared to FY17. This should result in lower credit cost and positively impact earnings.

Finally, with the government upping the ante on resolution, a host of cases is expected to see the light of resolution. With a background of healthy provision coverage, the burden of a significant haircut should be much less for SBI compared to many of its peers that have very poor cover. However, with a significant share of mid corporate and SME in the non-performing book, the resolution might be lot more time consuming than the optimistic estimates of the street.

Exhibit_2_Chart22017-new

Still a lot of value to be had

Notwithstanding the 72-percent rise in the stock price in the past one year, we feel that the quality of earnings and the upside linked to NPA resolution make SBI a must-have in any investor’s portfolio. While the management may be considering a capital raise to be well-prepared for the upturn, it is well capitalised for smooth navigation through FY18. At the current price, factoring in the value of the non-banking subsidiaries, SBI trades at an attractive valuation of 1.6X trailing adjusted book.
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