State Bank of India (SBI)'s Q4FY14 profit after tax of R30.4bn (down 8% year-on-year) was 13% ahead of our estimate, owing to controlled operating expenses (flat y-o-y). Asset quality improved, with higher-than-expected upgradations and recoveries, driving total stressed assets to 8.4% (vs 9.1% at end-Q3). The increase in provision coverage and write-offs, however, kept credit costs high at 230bps.
Given that the fourth quarters over the last three years have seen a significant seasonal improvement in asset quality, we await the bank’s performance in H1FY15
before calling it a turnaround on asset quality.
We expect only a gradual RoA (return on assets) improvement over the next two years before the significant capital requirement from Basel-III will begin kicking in, which would cap sustainable RoEs (returns on equity) to 12-13%. A more durable catalyst for a re-rating, in our view, is governance reforms at PSU banks, as suggested by the PJ Nayak committee, but the political will to implement these reforms remains questionable. We remain SELLers with a target price of R1,560 (vs R1,430 earlier, a 9% upgrade).
Results overview: SBI reported Q4 net profit of R30.4bn, 8% ahead of consensus estimate. Asset quality improved quarter-on-quarter, with total stressed assets declining to 8.4% of loans vs 9.1% at end-Q3. Upgradations and recoveries (R84bn) outpaced fresh NPAs (R79bn) during the quarter. Trends on loan growth (16% y-o-y), net interest margins (3.1% in Q4FY14) and core non-interest income (up 12% y-o-y) were in line with our expectations.
Whilst the gross addition to NPAs (3.1% of loans) remained
elevated, upgradations and recoveries were higher than our expectations and drove a 9% q-o-q reduction in NPAs (non-performing assets). The bank sold NPAs worth R36bn during the quarter (R17bn in recoveries and R19bn in write-offs). Mid-corporate (19% of total loans) continues to be the most-stressed segment, accounting for 81% of fresh NPAs. Despite the negative net delinquencies, increase in provision coverage (to 50% from 45% at end-Q3FY14) and high write-offs led to credit costs being elevated at 230bps vs 115bps in 9MFY14.
The additions to restructured loans remained high at R74bn vs R228bn in 9MFY14. Total stressed assets (gross NPA + standard restructured) thus stand at 8.4% of loans (vs 9.1% at end-Q3FY14 and 7.8% at end-FY13).
Loan growth was at 16% y-o-y. Corporate loans (up 24% y-o-y) and international loans (up 27%
y-o-y) drove the loan growth.
Retail loans were up 13% y-o-y, driven by home