State Bank Of India - Research Report

 

Private Client Research

Rating

Buy

Sector

Bank - Public

Company

State Bank Of India

Reco Price
Rs. 233.70
Price Target (1 Year)
Rs. 281.00
Upside
20.24%

Date

July 18, 2016
Sensex
27746.66
CNX Nifty
8508.70

Exchange

Code

NSE
SBIN
BSE
500112

Merger of subsidiaries and improving economic scenerio will lead to growth.

Merger with associates remains on track; should be done by end of FY17:
SBI's merger with the associates remains one of the top agenda and the bank has appointed consultants for valuation purposes, expecting the merger to conclude by FY17 end. The swap ratio between SBIN and its associates will be a function of earnings, asset quality, provisioning coverage, net-worth, market share, liability franchise etc. Both SBI and the Subs are on the same technology platform and hence the integration is expected to be a smooth process. Merger synergies will help reduce C/I ratio by around 150bp; expect savings of ~Rs. 1500 crores in one year following merger. It would help improve cost ratios as cost of corporate/training centers, administration cost will decline. The combined employee base of SBI+Subs stands at 280000 which is expected to declined to 240000-250000 over next 2-3 years aided by continued retirement and attrition rate. The bank also plans to wind-up/covert into ATMs of some large corporate branches as it rationalizes the overall network presence. Likewise the number of CGMs, GMs, DMDs will come down (by way of retrials) post merger which will help reduce employee cost.

Capitalization level will decline marginally:
Tier-I of SBI will come down post merger owing to relatively lower capitalization level of the subsidiaries. Moreover SBI being a Domestic Systemically Important Bank (D-SIB), it needs to carry a 60 bp of higher capital which will result in higher capital requirement post merger. However, subs together are having revaluation assets of Rs. 1800 crores (post 45% discount) which will help ease capital pressure. Besides, SBI is also looking to monetize some stake in SBI life (10%) and general insurance (23%) which will help garner Rs. 3000 crores.

Better operating metrics:
Strong non-interest income and healthy loan trajectory supported the operating profits of the bank with sturdy a 38% sequential growth and 14%+ Y-o-Y growth during the last March quarter. SBI’s loan book acceleration outpaces peers with loans growing at 13% Y-o-Y primarily buoyed by healthy 20% retail loans with greater traction in mortgage and auto loans during FY16. Moreover, SBI recorded significant market share gains in home and auto loan segments. The non-interest income traction (25.6% Y-o-Y growth) led by 18% Y-o-Y growth in fee income, enabled a staggering 44.5% Y-o-Y growth in recovery from written-off accounts and forex gains of Rs 2030 crores. Also, NIMs for the quarter at 2.96% witnessed a 20 bps Y-o-Y decline but were up 3 bps Q-o-Q, CASA augmentation stood steady with ratio improving to a healthy 43.8%.

Largest bank in India by a distance, strong deposit franchise:
SBI being the largest bank in India, both by asset size (Rs 23 lakh crores) and profitability played the lead role in the banking space in setting interest rate, products, etc. SBI has managed a CASA ratio of >41% and retail deposit >80% of deposit, which is stable in nature. Though its credit grew strongly in the past at a 17.4% CAGR from Rs 542503 crores in FY09 to Rs 1209829 crores in FY14 and deposit has grown at 13.4% CAGR from Rs 742070 crores to Rs 1394409 crores. This is moderating since FY15 and, going ahead, with retail and better rated corporate segment in focus, we expect credit growth to remain moderate at 12.5% CAGR in FY17-18E to Rs1853012 crores with improved loan book.

Stock Data

CMP (Rs)
228.75
Face value (Rs)
1
52 Week Range (Rs)
291.80 - 148.25
Market cap (Rs Crores)
174351.97
Price To Book Value (x)
0.97
P/E Ratio (x)
14.26
EV/EBIDTA (x)
4.85

One Year indexed Stock Performance

State Bank Of IndiaSensex
State Bank Of India
Return (%)
1m
6m
12m
36m
Absolute
5.95
26.38
-14.47
25.39
Sensex
3.27
14.71
-2.37
37.85

Shareholders

(in %)
30-Jun
Promoter
61.30
Public
38.70
Others
0.00
Total
100

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Industry

The financial and economic conditions in the country are far superior to any other country in the world. Credit, market and liquidity risk studies suggest that Indian banks are generally resilient and have withstood the global downturn well.

Indian banking industry has recently witnessed the roll out of innovative banking models like payments and small finance banks. The central bank granted in-principle approval to 11 payments banks and 10 small finance banks in FY 2015-16.RBI’s new measures may go a long way in helping the restructuring of the domestic banking industry.

The Indian banking system consists of 26 public sector banks, 25 private sector banks, 43 foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative banks, in addition to cooperative credit institutions. Public-sector banks control nearly 80% of the market, thereby leaving comparatively much smaller shares for its private peers. Banks are also encouraging their customers to manage their finances using mobile phones. The value of mobile banking transactions in December 2015 increased four times year-on-year and jumped by 46% over the previous month to Rs 49029 crores, as per data from the RBI.

Profile

State Bank of India provides a range of products and services to personal, commercial enterprises, large corporates, public bodies and institutional customers. Its segments include Treasury, which includes the entire investment portfolio and trading in foreign exchange contracts and derivative contracts; Corporate/Wholesale Banking, which comprises the lending activities of Corporate Accounts Group, Mid Corporate Accounts Group and Stressed Assets Management Group; Retail Banking, which comprises branches in National Banking Group, which primarily includes Personal Banking activities, including lending activities to corporate customers having banking relations with branches in the National Banking Group, and Other Banking Business, which includes the operations of all the Non-Banking Subsidiaries/Joint Ventures other than SBI Life Insurance Co. Ltd. and SBI General Insurance Co. Ltd. Its geographical segments include Domestic Operations and Foreign Operations.

Profit & Loss Statement:- (Standalone)
(Rs Crores)
Particulars
Mar-14
Mar-15
Mar-16
Mar-17E
Mar-18E
Income:-
  • Interest Earned
  • Other Income
  • Total Income
  • Growth (%)
  • Interest Expended
  • Operating Expenses
  • Provisions and Contingencies
  • Profit Before Tax
  • Taxes
  • Profit After Tax
  • Adjusted EPS
  • 136350.80
  • 18552.92
  • 154903.72
  • -
  • 87068.63
  • 35725.85
  • 15935.35
  • 16173.88
  • 5282.71
  • 10891.17
  • 14.59
  • 152397.07
  • 22575.89
  • 174972.97
  • 12.96
  • 97381.82
  • 38053.87
  • 20223.31
  • 19313.96
  • 6212.39
  • 13101.57
  • 17.55
  • 163685.31
  • 28158.36
  • 191843.67
  • 9.64
  • 106803.49
  • 41782.37
  • 29483.75
  • 13774.05
  • 3823.40
  • 9950.65
  • 12.82
  • 180525.20
  • 30000.00
  • 210525.20
  • 9.74
  • 112548.50
  • 46995.00
  • 35350.50
  • 15631.20
  • 4338.906
  • 11292.29
  • 14.55
  • 201258.50
  • 30000.00
  • 231258.50
  • 9.85
  • 124945.00
  • 53561.00
  • 33846.50
  • 18906.00
  • 5247.925
  • 13658.08
  • 16.40
Source: Stockaxis Research, Company Data

Valuation

Despite the aggressive RBI asset quality review and accelerated provisioning, coupled with elevated slippages during FY16, the bank’s proactive NPA management, strong operating metrics and strengthened capital base (asset monetization; merger benefits) positions SBI relatively better than its peers in the banking space.

Therefore, we assign the valuation multiple higher to 1.15x P/ABV FY18E indicating the target price of Rs 280 with a long term horizon.

 

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