SBI - A Good Buy?

The State Bank of India (SBI) posted its December quarter  numbers on February 13, 2012. The asset quality of the bank continues to worsen while its net interest margin (NIM) has improved further. The bank yesterday announced its results during the market hours and the scrip closed down by 2 per cent. However, today the scrip closed up by 3.26 per cent at Rs 2,198.45. We believe that SBI is a good long-term bet and one can invest in the scrip keeping that perspective in mind.

For the quarter ended December 2011, the net interest income of the bank increased by 26.70 per cent to Rs 11,466 crore while the net profit increased by 15.38 per cent to Rs 3,263 crore on a YoY basis. Meanwhile, the ‘other’ income of the bank de-grew by 36 per cent to Rs 2,126 crore mainly because of the loss on sale of investment in equity of Rs 1,063 crore.

It’s very good to see that the net interest margin (NIM) of the bank is improving which, on a YoY basis, increased by 44 basis points to 4.05 per cent and on a sequential basis by 26 basis points. This is due to the cost of deposits for the bank which increased by 70 basis points while the yield on advances surged by 135 basis points. The management has guided that from here onwards the NIM will show gradual improvement in the coming quarters.

As on December 31, 2011, the capital adequacy ratio (CAR) of the bank stood at 11.6 per cent while the Tier 1 CAR came in at 7.59 per cent. The bank has received a letter from the government for infusion of funds worth Rs 7,900 crore. The management has guided that the funds would be received before March 31, 2012 and the Tier 1 CAR of the bank for FY12 would probably be at 9 per cent.

The asset quality of the bank continues to worsen. The gross NPAs of the bank increased by 144 basis points to 4.61 per cent while the net NPAs of the bank increased by 61 basis points to 2.22 per cent on a YoY basis. Even on a sequential basis the asset quality has continued to show deterioration. Therefore, there is concern on the asset quality front and we feel that even in the next quarter the bank may find it difficult to show much improvement.

Fresh slippages of Rs 6,001 crore were seen during the December quarter of which Rs 1,184 crore was from Kingfisher Airlines. The management guided that the metal industry is looking under pressure and one can expect some pain going ahead. Further, those companies supplying spare parts and other material to the state electricity boards are facing some headwinds as they are not able to receive their dues in a timely manner.  

As on December 31, 2011, the advances of the bank increased by 16.46 per cent to Rs 8.46 lakh crore while the deposits grew by 13.88 per cent to Rs 10 lakh crore. The bank has not deregulated its savings interest rate and despite this it has witnessed healthy growth of 15.33 per cent in this segment. This helps us to understand the size and the brand image that the bank has created in the minds of the customers.

The revenue from the treasury segment has displayed a muted performance, though it has contributed well to the bottomline. The revenue de-grew by 2.38 per cent to Rs 5,457 crore while the segment posted profit of Rs 392 crore against loss of Rs 724 crore in a similar period during the last quarter.

Going ahead, with the interest rate expected to reverse, SBI’s NIM will improve. In addition to that, capital infusion from the government will provide relief to the bank in maintaining the CAR. With this the management has guided that it may go for a re-rating to Moody’s which earlier had notched it one grade lower. Any move in the direction would benefit the bank going forward. We believe that the bank will face some headwinds while maintaining the asset quality but the worst is almost over for the bank and it may perform well in the coming quarters. One can invest in the scrip in a staggering manner keeping in mind a long-term horizon.  

The following are the banks key financials: