Monday, June 13, 2016

State Bank of India Ltd: Buy
CMP: Rs.201.70
Earnings being weaker on the back of higher slippages (1.5x of Q3) is not news. What made headlines is the watch-list, a mere 2.1% of exposure with 70% LGD (loss given default) over the next 12 months. The Street gives only one chance for redemption (e.g. BOB’s flipflop between Q3 and Q4). And, this is SBIN’s moment. We hope they are being realistic, neither optimistic nor subjective. Retain Buy, no PT change.

Defining moment: The bank (parent) disclosed only 2% potential stress with min-max LGD of 30-70% in next 12 mths. If this plays out, our book value estimates could rise 30-40%. As unbelievable as it may sound and the stock could be significantly buoyant in the near term, we wish to sensitise that a flipflop on this could be very damaging and hope the bank is being realistic. 

If this is evidenced by better asset quality trend over next few quarters, we think the medium term upside could be significant (better NIM, loan growth, lower credit costs, etc.). For now, we have largely ignored the watchlist, baked in slightly higher provisions, flat NIMs & forecast 14-15% RoE by FY19e. We continue to factor 100% LGD for NPA & 50% across other impaired assets, although have baked in the optimism through higher multiples.

Cut estimates: We cut standalone EPS estimates by 30% & 22% in FY17 & FY18, consol EPS by 15.6% & 18%. We forecast FY16-19 EPS CAGR of 37% for the standalone & 40.7% for the consol entity. For the parent bank, we pencil in ~3.1% NIM, 50% expense ratio, credit costs of 157bps, 137bps & 113bps for FY17-19, with 15.3% loan growth CAGR over FY16-19.

Valuation/Risks: SBIN trades at 1.5x consol trailing BV (Mar16) & 6.7x EPS (12m to Mar17e). 

We value it at R280, implying P/B-P/E multiples of 1.6x (Mar17e) & 7.8x (12m to Mar18e). This compares with 10-year average of 1.5x & 9x respectively. 

Risks: Asset quality, loan growth.

Other Considerations
Largest liability franchise and CASA/deposit growth remains strong. Stealing retail market share in recent times, although incremental revenue impact could be a lot weaker given the various discounts.

Asset quality–Watch-list much lower than feared
SBI disclosed Rs 313.5 bn as additional stressed exposures to be monitored after undertaking increased recognition in H2FY16. Out of this watch-list of Rs 313.5 bn, the bank expects slippages to the tune of 70% in a poor scenario, and 30% in an optimistic scenario.
Adding the watch-list (2.1% of gross advances) to the disclosed gross NPA of the bank (6.5%), we get a total stressed assets figure as per the bank’s disclosures of 8.6% of gross advances. The additional 2.1% comprises 0.8% from the standard restructured book, 0.2% from the non-NPA 5/25 and SDR book and 1.1% from the currently standard book.

Based on our classification of stressed assets for the bank, i.e., gross NPA + restructured + non-NPA 5/25 + non-NPA SDR, we get a total stressed assets figure of 10.3% of gross advances.

Based on the bank’s watch-list disclosure, we find that the bank sees stress in 30% (R116.6 bn) of its currently outstanding standard restructured book (R390.6 bn), and 14% (R25.8 bn) in its non-NPA 5/25 and non-NPA SDR book (R181.4 bn).

Specific to Q4, there was a sharp spurt in slippages (R303.5 bn, implying a slippage ratio of 9.33%), mainly driven by recognition of stressed accounts from the asset quality review of other banks. R10.4 bn slipped from the SME, agri and personal segment, while R92 bn was the result of the residual AQR impact for the bank from its own list of accounts. 

The remaining R200 bn slippage was on account of the bank classifying large and mid-corporate accounts which were on the AQR lists of other banks as NPA. Out of the total slippages, R77 bn came from the previously restructured book, while R59.3 bn and R73.5 bn was from the SDR and 5/25 book respectively. The total 5/25 and SDR cases amount to R190 bn and R110 bn respectively, out of which R63.5 bn and R160 bn respectively have already been recognised as NPA.

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