Q4 SBI Result Update by unicon

State Bank of India (SBI) reported at sharp decline in profits by

31.9% to INR 187.6 Bn (below our estimates of INR 255.9 Bn) from INR 274.2 Bn, largely due to higher provisioning for NPAs, operating & credit costs. SBI reported strong net interest income (NII) by 39% YoY to INR 67.12 Bn (inline with our estimates of INR 69.7 Bn). To mop up the excess liquidity, SBI has strategically reduced its deposits growth to 16% YoY as compared to advance growth of 17% YoY. The credit deposit ratio improved by 693 bps in FY10 to 73.56% from 66.63% YoY.

With lower cost of deposits & better utilization of surplus liquidity SBI’s Net Interest Margins (NIMs) improved by 54 bps to 2.93% YoY from 2.39% YoY & 2.82% QoQ. The cost of deposits declined by 12 bps QoQ & 50 bps YoY to 5.8%. In Q4FY10 CASA deposits grew by 27% YoY to INR 3465 Bn, due to high share of low cost of deposits & 50% YoY decline in bulk deposits.

SBI has registered a low operating efficiency as cost-income ratio rose to 52.59% & operating costs jumped sharply by 40.9% YoY &19.2% QoQ to INR 60.4 bn led by higher provisions for wage arrears, new employee additions and branch expansion (1049 inFY10).

An asset quality pressure continues as the gross NPAs increased

to 3.05% from 2.86% YoY, however, the net NPAs have fallen

marginally to 1.72% from 1.79% YoY in Q4FY10.Slippages continued to remain high at INR 25 bn. (1.6% of gross loans) in Q4FY10 & INR 118.4 bn (1.8%) in FY10. NPA coverage ratio in Q4FY10 stood at 59.2% (Including Technical write-off) from 56.2% in Q3FY10 and the bank has received RBI approval to raise it to 70% mark by March-2011 as against September, 2010 earlier. The restructured advances stood at 4.2% (INR 268 Bn) of total advances with incrementa structuring of INR 30 bn in Q4FY10.

Capital Adequacy Ratio (CAR) for the bank remains healthy at 13.4% and Tier I CAR at 9.5%. The bank management has guided to raiseINR 2-3 Bn via retail bond issuance which will boost Tier II capital of the bank.

Outlook

Due to sluggish credit off-take, excess liquidity & higher slippages SBI posted a subdued performance in FY10. However, going ahead the credit growth is expected to improve22% in FY11, which will help SBI

to improve its earnings. On back of ample liquidity on its balance sheet & strong NII, NIMs are likely to improve by 10-15 bps in FY11. However, asset quality concerns to remain in medium term. At the CMP of INR 2250 stock trades at 2.16x its P/BV, we have ACCUMULATE rating on the stock for target price of INR 2475