State Bank of India''s Q2FY2007 stand-alone net profit at Rs1,184.5 crore was down 2.5% yoy.
- State Bank of India''s (SBI) Q2FY2007 stand-alone net profit at Rs1,184.5 crore was down 2.5% year on year (yoy), but above our expectations of a fall of 11.4% largely due to the lower-than-expected operating expenses reported by the bank and on account of lower provisions.
- The net interest income (NII) grew by 8.1% yoy to Rs3,898.7 crore, above our expectations of a 6.9% growth. The improved yield on the advances (up by 67 basis points) to 8.48% over a 21.2% advances growth coupled with the lower cost of deposits (down 15 basis points) to 4.64% mainly resulted in a better NII growth. The reported core net interest margin (NIM; adjusted for a one-time interest income) for H1FY2007 has improved by 40 basis points to 3.32%.
- Most other PSU banks have reported an increase in the cost of deposits, while SBI has reported a fall mainly due to the improvement in its CASA ratio to 42.6% from 39.5% and the lowering of the bulk deposit rates to discourage high-cost deposits in its books.
- The other income increased by 10.7% yoy to Rs1,433.8 crore, restricted mainly due to a drop of 96.9% in the trading income during Q2FY2007 to Rs7.7 crore from Rs246.7 crore in Q2FY2006. The other income excluding the treasury income reported a very strong growth of 36.1%.
- With the net income up by 8.8% yoy and a decrease of 2% in the operating expenses, the operating profit increased by a healthy 24.7% yoy. The operating profit excluding the treasury income was up 42% yoy.
- The provisions were down 16.7% yoy mainly on account of the absence of investment depreciation during the quarter. However the tax outflow at Rs606 crore with an effective tax rate of 33.9% was much above our expectations.
- At the current market price of Rs1,095, the stock is quoting at 9.6x its FY2008E earnings per share (EPS), 4.5x its pre-provision profits (PPP), 1.6x its stand-alone book value and 1.3x its consolidated book value. The bank is definitely a proxy investment for the Indian economy and the improved operating performance post the redemption of India Millennium Deposits (IMDs) could still provide some upside from the current levels. We maintain our Buy call on the stock with a price target of Rs1,116.
NII up 8.1%, strong 37.1% y-o-y increase in interest on advances
The NII has grown yoy by 8.1%, which is above our estimates of a growth of 6.9%. The improved NII was achieved due to a strong 37.1% year-on-year (y-o-y) increase in the interest on advances. The strong growth in the interest on advances was a result of a higher yield on the advances (up 67 basis points yoy) coupled with a 21.2% advances growth.
Improved CASA ratio helps in lowering deposit costs
The deposit costs have decreased by 15 basis points during the quarter on a y-o-y basis and by 17 basis points on a q-o-q basis. Most other PSU banks have reported an increase in the cost of deposits, while SBI has reported a fall mainly due to the increase in its CASA ratio to 42.6% from 39.5% and the lowering of the bulk deposit rates to discourage high-cost deposits in its books. The CASA ratio improvement was supported by its vast ATM network and the focus on new salary accounts.
Advances up 21% yoy with retail advances up 26.1% yoy
The advances growth of 21.2% yoy for the bank has been below the industry average of ~30%; however the bank has reported a strong growth of 26.1% yoy in the retail segment which constitutes 25.8% of the bank''s gross domestic advances at the end of September 2006. The housing loans constitute 52.5% of the bank''s retail advances as on September 2006.
Fee income reports robust growth of 36.1% yoy
The other income increased by 10.7% yoy to Rs1,433.8 crore and was restricted mainly due to a sudden drop of 96.9% in the trading income during Q2FY2007 to Rs7.7 crore from Rs246.7 crore in Q2FY2006. The almost 100% y-o-y sudden drop in the trading income during Q2FY2007 despite the bond market activities remaining healthy with the benchmark yields having retraced by almost 50 basis points qoq raises some doubt on the bank''s treasury management. However, the same has been taken care of post-September 2006; hence Q3FY2007 numbers would reflect the same.
The other income excluding the treasury income reported a very strong growth of 36.1%. The loan processing fees and the locker and ATM related fees have largely contributed to the robust growth in the fee income.
Operating expenses down 2%
The operating expenses reported a fall of 2% yoy to Rs2,859.9 crore with the staff costs reporting a y-o-y fall of 4.2% to Rs1,954.7 crore. The staff costs would have been much lower, in absence of the ongoing payments to the staff opting for an early exit.
Asset quality remains steady
The gross NPAs reduced to Rs10,306.5 crore (3.57%) at the end of September 2006 from Rs12,531.8 crore (5.26%) at the end of September 2005 due to higher upgradations and recoveries. However on a sequential basis the gross NPAs stood at Rs10,386 crore (3.88%) at the end of June 2006. The net NPAs reduced to 1.67% of the net advances at the end of September 2006 from 2.27% at the end of September 2005; however on a q-o-q basis the net NPAs stood at 1.69% at the end of June 2006.
Capital adequacy remains comfortable
The capital adequacy ratio of the bank as on September 2006 stood at 12.63% with the Tier-I ratio at 8.74%. The bank has eligibility to raise further Tier-I hybrid debt of over Rs4,000 crore. The operational risk impact on the implementation of the Basel-II norms is estimated at 105 basis points.
Clarity provided on pension and AS15 impact
The management provided clarity on the key issues relating to the pension liabilities and the liabilities arising out of the implementation of the revised accounting standard (AS) 15. SBI had earlier indicated that almost Rs800 crore of the additional provision would have to be made to meet the increased pension requirements under the renegotiated agreement with the employees in FY2006. However, the management has now indicated that the same would not be required, as it has excess provisions to meet the liability.
The management has also indicated that its liability under the new AS15 (see our note ''Change in pension norms negative for PSBs'' dated august 18, 2006) could be to the tune of Rs5,000 crore, much higher than our estimates of Rs3,200 crore. While this will have a huge impact on SBI''s book value, a great reprieve would come if the Institute of Chartered Accountants of India (ICAI) and the Reserve Bank of India allow it to be written off over period of five years. SBI would be biggest beneficiary of such a reprieve.
Valuation and view
At the current market price of Rs1,095, the stock is quoting at 9.6x its FY2008E EPS, 4.5x its pre-provision profits (PPP), 1.6x its stand-alone book value and 1.3x its consolidated book value. The bank is definitely a proxy investment for the Indian economy and the improved operating performance with the busy season ahead could still provide some upside from the current levels. We maintain our Buy call on the stock with a price target of Rs1,116