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For 3QFY2016, State Bank of India (SBI) reported a PAT of `1,115cr, which is in
line with our expectation. Although the PAT declined by 61.7% yoy and 71.2% qoq,
the performance can still be termed satisfactory given the cleaning up of NPAs taken
up by the bank and with it having provided for higher provisions during the quarter.
Higher provisions dented profits; NIM under pressure: The bank’s advances
grew by a healthy 12.9% yoy while its deposits grew by 10.7% yoy during the
quarter. The NII declined by 1.2% yoy due to interest reversal to the tune of
`450cr on NPA recognition. The operating profit grew by a meager 3.3% yoy
however, it declined by 7% qoq while provisions went up by 2x qoq, thereby
leading the PAT to decline by 61.7% yoy and 71% qoq to `1,115cr.
Asset quality deteriorated further, but cleaning up of balance sheet a positive
move: Fresh slippages for the quarter came in at `20,692cr (slippage ratio of
6.2%) as against `5,875cr in 2QFY2016. Slippages from AQR related accounts
were at `14,800cr (70% of these were accounted by 3 accounts in the steel and
textile sectors) while `5,000cr of slippages were from the restructured book. SBI
has not recognized all of the AQR accounts as NPAs; hence, an equal amount of
slippages can be expected in 4QFY2016 as well. The Gross NPA ratio went up to
5.10% vs 4.15% in 2QFY2016 and the Net NPA ratio went up to 2.89% from
2.14% in the sequential previous quarter. The bank refinanced ~ `8,400cr worth
of loans under the 5/25 scheme with ~`4,000cr of loans further in the pipeline.
The outstanding standard 5/25 balance stood at `10,900cr. SBI implemented
SDR worth `7,700cr during the quarter. Total stressed assets
(GNPAs+Resturectured+SDR+5/25) accounted for 12.6% of the loan book.
Outlook and valuation: The current quarter’s results for SBI were disappointing
due to a sharp rise in provisions and higher NPA recognition. However, we
believe SBI is well placed compared to other PSU banks with regards to stressed
assets. In our view, the stock is currently trading at a moderate valuation of 0.6x
FY2017E ABV (after adjusting `33/share towards value of subsidiaries) as
compared to its peers. Though stress is likely to persist in the banking system, SBI
is better positioned to meet the challenges, given its decent capital adequacy of
12.45%. Hence, we recommend an ACCUMULATE on the stock.

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