The State Bank of India's (SBI) Q2FY14 PAT (profit after tax) of Rs 23.8 bn came in lower than our estimate due to higher opex (operating expense) and credit costs. Positives were: (i) slippage moderation to 3.1% run rate; (ii) NIMs (net interest margins) at 3.2% with 25bps YoA (yield on assets) expansion quarter-on-quarter; and (iii) advance growth of 4% q-o-q to R11.4tn (substitution demand led), feeding into healthy NII (net interest income) leading to 'buy' call on shares.
While headline restructuring looks elevated with Rs 85.9 bn addition, 46% was on account of Tamil Nadu and Uttar Pradesh SEBs (state electricity boards). Opex jumped 32% year-on-year, which along with high provisions (credit cost of 110bps) impacted bottom line. A 300bps drop in tax rate to 28% aided PAT to an extent. Also, investment depreciation write-back in overseas portfolio helped restrict MTM (marked-to-market) hit from domestic yields spike. However, with: (i) tax rate normalisation; (ii) MTM hit; (iii) sticky operating and credit costs; and (iv) subdued revenue growth, PAT is likely to be muted going forward. While difficult macro environment continues to be a dampener, valuation of 0.9x FY15e P/ABV—price/adjusted book value—(consolidated) is comfortable given stable retail liability franchise and lower wholesale borrowings.
Slippages moderate, but headline restructuring comes in elevated: SBI’s slippages came in lower than anticipated at Rs 83.7 bn, a sharp drop from the high of Rs 137.7 bn in Q1FY14. Performance improved in agri, SME and retail segments and is guided to be sustainable by management. Recoveries/upgrades of Rs 38 bn and write-off of R12.5 bn restricted GNPLs (gross non-performing loans) to Rs 642 bn/5.64% (up 5.4% q-o-q). Problem sectors continue to be power (Rs 18 bn lumpy account), iron & steel and infrastructure (R5 bn lumpy account). Restructuring pipeline of another ~Rs 50 bn-60 bn is under CDR (corporate debt restructuring), making us vigilant on asset quality trajectory even as SBI guided for further pain. We are building in GNPLs of 5.3% by FY15 and credit cost of 110bps over FY14-15.