State Bank of India – Hold

State Bank of India (SBI) disappointed with its September quarter results which in fact were similar to what other PSU banks have reported. All have seen asset their quality worsen. The SBI stock plunged almost 4 per cent on the day of its result announcement, and is now trading at Rs 2150.60. Even though it is the largest bank in the country, it has not been able to maintain its asset quality unlike other Private banking players. It seems to be facing serious issues on the asset quality front over the last six to seven quarters.

SBIs Gross NPAs increased by 96 basis points to 5.15 per cent on a YoY basis. Even sequentially its NPAs have expanded by 16 basis points which is not a healthy sign at all. Even its Net NPAs are showing a similar trend. They were up 40 basis points to 2.44 per cent on a YoY basis and surged by 22 basis points on a sequential basis. Its Provision Coverage Ratio (PCR) stands at 63.50 per cent which is well below the RBI expected level of around 70 per cent. This means its asset quality may probably worsen further going ahead. Its troubles on the asset quality front are not likely to go away so easily.  

SBIs Net Interest Margin (NIM) showed some contraction in the September quarter. NIM as a whole (Global and domestic business) decreased by 26 basis points to 3.45 per cent on a YoY basis. This was primarily because its Cost of funds increased by 44 basis points to 6.47 per cent while the Yield on Assets expanded marginally by 14 basis points to 9.87 per cent. As on 30^th September 2012, the Capital Adequacy Ratio (CAR) of the bank increased by 123 basis points to 12.63 per cent, with Tier 1 CAR standing at 8.97 per cent which is at a decent level.

On a standalone basis, Net Interest Income (NII) increased marginally by 4.69 per cent to Rs 10974 crore while its Net profit grew by 30 per cent to Rs 3658 crore on a YoY basis. On a consolidated basis too, the bank’s net profit saw a handsome growth of 32 per cent to Rs 4575 crore on a YoY basis.

Deposits of the Bank increased by 16.5 per cent to Rs 1133,644 crore while Advances grew at the rate of 18 per cent to Rs.956,000 crore on a YoY basis. This is above the RBIs projection of deposit and advances growth of around 15 and 16 per cent for FY2013 and stands to be the only positive attribute of SBIs performance for the September quarter.

A couple of days after SBI announced its results, the management went on record, stating that it had discovered an anomaly in the computation of stressed assets for the September quarter. This was to reduce its slippages by around Rs 1400 crore. They however did mention that it would have no bearing on the ratios as the upgrades had also gone down. It did help the stock to recover a bit from thereon.

As on 30^th September, 2012, SBI’s group Branch network stood at 19421 Branches and 28087 ATMs.  On the valuation front the bank is currently available at a trailing PE multiple of 9.51 times and its Price to Book Value stands at 1.77 times. Though the bank is facing some headwinds in the near term, any reduction in key rates could help it. For those who have already invested, should hold the counter as of now and investors looking to enter should invest in a staggering manner to garner better returns.