'Neutral' ratings on State Bank Of India shares, Pace of debt recast slows down: J P Morgan

Feb 24 2014, 15:24 IST
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SummarySteep decline in profit because of weak asset quality, one-off tax hit

The State Bank of India reported a profit after tax of Rs 22.3 bn (down 34% year-on-year, 8%

Asset quality: Gross delinquencies remained elevated and stood at 4% vs. 3% in Q2. Recovery+ upgrades were also muted at 17% vs. 25% in Q2. However, higher write-offs led to lower headline gross NPLs of 5.74% (up only 9bp quarter-on-quarter). The fresh slippages mainly emanated from the mid-corporate and SME segments, which are the most vulnerable in the current environment. Credit costs also remained higher, at 1.25% vs. 1.12% in Q2. Management stated that the asset quality will improve with a two-quarter lag once the economy turns around. We expect asset quality stress to continue in the medium term, given the weak macro.

C/Income: C/Income (cost-to-income) remained higher at 55%, as opex (operating expense) grew 31% while revenue grew just 14% y-o-y. Wage costs were higher at 35% y-o-y due mainly to: (i) higher pension provision on account of revisions in the mortality table. The management stated that the full impact of pension costs is likely to crystalise by March-end once the actuarial valuation is done. We believe there could be some benefit on pension costs due to higher rates; and (ii) higher wage hike provisions, pending the final settlement. Overheads costs were also higher, at 26% y-o-y. The management mentioned that it is an area of concern and significant steps are taken to bring it down.

Margins: Domestic margins remained resilient, at 3.49% (up2bp q-o-q). YOA (yield on assets) were up 8bp q-o-q, at 10.4%, due mainly to a base rate hike of 20bp in Nov-13. Despite higher rates, the funding costs were up just 2bp q-o-q, to 6.4%. The management expects margins to remain stable at the current levels, in line with our expectations, given the recent cap hike. Savings account growth was impressive at 5% y-o-y, while CASA (current account and savings account) remained strong at 43.9%.

Loan growth: Domestic loan

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