* SBIs Q1 profits of R33.5 bn were up 3.3% year-on-year, slightly ahead of our estimates. Operationally it was a healthy quarter with PPOP (pre-provision operating profit)ex-trading gainsup 29% y-o-y, led by strong cost control (+3% y-o-y).
* Asset quality was mixed while NPLs (non-performing loans) and gross stressed assets (8.3% of loans) were stable, slippages remained high at 3.3% (annualised). Credit costs were lower (129bps annualised) on higher sales (R56 bn) to ARCs (asset reconstruction companies).
* NIMs (net interest margins) were stable at 313bps - higher domestic margins offsetting decline in international NIMs. Expect NIMs to remain range-bound near term.
* Costs were under tight control (+3.3% y-o-y) as management focuses on improving cost efficiencies. Cost income ratio was at 50% (53% in Q1FY14).
Key positives: Strong cost control, robust core operating profits, stable NPLs.
Key negatives: High slippages, slower loan growth (+13% y-o-y).
Impact on financials: We raise earnings 6-9% over FY15-16e to factor in lower operating and credit costs medium term.
Valuations & view: We upgrade SBI to Outperformer with an unchanged target price of R3,013 (standalone bank valued at 1.5x Sep15e P/BV of R2,561, associate banks at R338 valued at 0.75x Sep15e P/BVprice-to-book value).
SBIs core operating profitability has improved sharply in the last two quarters as management has focused on reducing costs, maintaining stable NIMs. While asset quality stress has remained high, we believe stabilising economy should lower credit costs medium term, leading to higher earnings growth. SBI remains amongst the best capitalised PSU banks (9.8% CET 1common equity tier-1) and a strong deposit franchise (43.5% CASA) and should continue to trade at a premium to other PSU banks. The stock has corrected in the last two months and has underperformed Sensex by 12%, we believe offers an attractive returns from CMP (current market price.)
* SBIs slippages were higher quarter-on-quarter at 3.3% annualised (2.7% in Q4). The mid-corporate segment continues to be the largest contributor to NPL accretion with R42.5 billion of slippages (43% of total).
* However, aided by sale of NPLs worth R56 bn to ARCs, GNPLs (gross NPL) declined 2% q-o-q (at 4.9% of loans) in absolute terms. SBI also sold R4.9 bn of non-NPL accounts and R7.1bn of written-off accounts to ARCs during the quarter.
* SBI received R5.1 bn in cash and SRs (security receipts) worth R18.2bn as consideration for sale of loans to ARCs. The bank has accounted these receipts as a part of recoveries during the quarter and no income has been booked. Rise in GNPLs was also lower due to higher writeoffs (R65.6 bn), of which R30 bn pertained losses on accounts sold to ARCs.
* SBIs gross stressed assets were largely stable q-o-q at 8.3%. Incremental restructurings at R36 bn were lower q-o-q (and y-o-y). Management indicated that restructuring pipeline stood lower at R35 bn as of Q1.
* Credit costs declined on a q-o-q basis to 130bps (217bps in Q4).
* The management stated that SBIs total agricultural loans exposure to AP and Telangana states stands at R259 bn, of which R132 bn were agriculture loans against gold. Exposure to Bhushan Steel stands at R60 bn, of which R10 bn is working capital loans.
* Operating expenses grew at a slow pace as employee costs were flat on a y-o-y basis. In FY14 employee costs were impacted by provisions (worth R24 bn provided at R6 bn/quarter) on account of change in mortality tables.
The management utilised absence of such items to increase provisions for pension and provisions for wage hikes under bipartite agreements (R4.8 billion). Core salary expenses were up +7.8% y-o-y.
* The management also emphasized the positive impact of relatively high retirements (3,500 employees) during the quarter on employee costs.
* NIMs were stable-down 4bp q-o-q to 313bps in Q1, impacted primarily by lower international NIMs (down 34bp q-o-q to 108bps).
* Domestic NIMs were 5bp higher q-o-q to 354bps.
* Fee income growth was relatively modest at 12% y-o-y. Core fee income grew by 11% y-o-y. Growth in SBIs forex income remains strong +28.8% y-o-y.
* Loan growth in Q1 was relatively modest at 13% y-o-y. Corporate loans continued growth at a brisk pace (+34% y-o-y for large corporates). Growth in mid-corporate loans was relatively modest at 6% y-o-y. Retail loans grew 12% y-o-y.