Consistently improving performan-ce: SBI’s earnings continued to show solid improvement (31% year-on-year growth) on the back of lower operating costs and better revenue growth. Fresh impairments declined for the fifth consecutive quarter, with outstanding impairment ratios stable quarter-on-quarter. We continue to like SBI despite its strong outperformance and premium to its peers as we like the bank’s execution, strength of its capital base and liability franchise. Maintain Add (TP revised to R3,000 from R2,800).
Steady improvement in earnings led by cost controls: SBI reported an earnings growth of 31% on the back of 33% y-o-y growth in operating profits. Operating expenses grew at the slowest pace at 2% y-o-y on the back of lower staff costs. Loan-loss provisions were higher at 41% y-o-y but lower tax rate (25% of PBT) supported earnings.
Revenue growth was healthy at 15% y-o-y but NII (net interest income) growth slowed to 8% y-o-y as loan growth slowed to 9% y-o-y. Impairment ratios showed a decline of 80 bps q-o-q to 3.7% on the back of lower slippages and fresh restructuring. Gross NPLs (non-performing loans) were stable q-o-q at 4.9% of loans while restructured loans showed a marginal rise of 10 basis points to 3.6% of loans. Provision coverage showed a marginal decline of 150 bps q-o-q at 45.7%.
Fresh impairment improves for the fifth quarter: SBI has reported the fifth consecutive quarter of decline in fresh impairments (declined to 3.7% of loans as compared to a peak of about 7.5% a year ago). Slippages, primarily from restructured loans, declined to 2.6% of loans while fresh restructuring declined to 1.2% of loans. Mid-corporate and SME remain the prime areas of stress but the current quarter saw improvement in both the underlying portfolios.
The management highlighted that the pipeline of further loans to be restructured remains closer to this quarter’s levels. While it still remains high compared to private banks, we are positive that the trend can show further improvement as the economic growth gains traction.
SBI remains our preferred idea among public banks: We maintain our positive view on the bank, our preferred idea in public banks. At our TP (target price) of R3,000, we value the bank at 1.8x book (1.4x reported) and 12x FY16e EPS (earnings per share) for RoEs (returns on equity) in the range of 12-13% in the short term and 20% earnings CAGR (compound annual growth rate) for FY15-17e. Despite the strong outperformance, we still believe that there is scope for multiple expansion.
Given the bank’s high net non-performing loans there is a 25% discount between reported and adjusted book value, which we think could reduce if the recovery in the economic environment is better than expected (credit costs are higher than the RoAs—return on assets—at this time).
Further, the bank has been able to demonstrate (i) the superior ability to shift to retail as compared to its peers; (ii) a strong liability franchise gives the bank an advantage to do low-risk lending, which is reflected in the lower impairment ratios compared to peers; and (iii) strong capital adequacy ratios.
—Kotak Institutional Equities