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Morgan Stanley: State Bank of India:: Structural vs. Cyclical

SBI.BO, State Bank of India (Rs2,952.85) /Structural vs. Cyclical 

Why should an investor buy the stock? There are a few headwinds near term – potential rights
issue, Mr. Bhatt’s retirement, potential NIM compression and asset quality issues. These are
likely to keep the stock volatile over the next 3-4 months. But, we remain very positive over 12
months and SBI remains one of our key Asian picks for 2011.


Cyclical concerns: NIM compression, asset quality. We agree that current NIMs (3.4%) are
unsustainable, and were driven by higher lending rates; an increase in LD Ratio, which helped
more assets to be financed by CASA and the lag with which deposit rates trickle through
earnings. We assume 30-35 bps NIM compression over next 5 quarters from current peak levels.
However, this should be mitigated by lower credit costs. 

Structural improvements continue unabated. In our view, the best banks are ones with strong
deposit franchises. SBI’s market share in retail demand deposits (most sticky deposits) has risen
from 20% in F2007 to ~24% now and incrementally it’s running at almost 30%. On fees income
too, SBI’s market share is increasing fairly rapidly. Its ROA from lending business is at 0.94%
from 0.5% in F2005. These factors show that the structural improvements at SBI will continue.

SBI:Aligning deposit rates to market rates:: Kotak Sec

State Bank of India (SBIN)
Banks/Financial Institutions
Aligning deposit rates to market rates. We see SBI’s recent move to increase rates as
a measure to counter the rising cost of tight liquidity and normalize its interest rates in
line with market rates. We expect a marginal decline in NIMs in 2HFY11E from the
elevated levels of 2QFY11 and our earnings estimates capture that. We believe high
CASA banks will have a lower impact of rising funding costs compared to peers. We
maintain our estimates and believe the bank would benefit from better operating
leverage and lower provisions in FY2012. Maintain BUY.




Deposit rates across buckets increased by 50-150 bps; move aimed at normalization 
SBI today announced a hike in its deposit rates by 50-150 bps across various buckets as the
liquidity environment continues to remain tight (advance tax outflows in December). Lending rates
remain unchanged. The overall increase looks sharper, regardless, we believe this rate hike is
aimed at aligning SBI’s interest rates towards market rates and the tight liquidity environment
experienced by the industry. The sharpest rise has been in the 46-90 day bucket at 150 bps (5.5%
and one of the highest in the industry), indicating that SBI is probably looking at the current
liquidity deficit to be temporary in nature, a situation likely to reverse in 4QFY11 as government
spending improves. This rate however, continues to be lower than prevailing call money rates.
However, the rates have been increased by 100 bps in the 1-3 year categories (7.75-8.5%)   

Strong CASA ratio of 48% to cushion rising costs; building NIM decline in estimates
In light of tight liquidity environment, we favor high CASA banks like SBI to cushion the impact of
steep rise in deposit costs. As of 2QFY11, SBI had a CASA ratio of 48% (domestic deposits),
second highest in the industry following HDFC Bank. 

We anyways build reasonable cushions in our 2HFY11 estimates as we expect FY2011
improvement in NIM (calc) of about 45 bps while the bank has been running at about 60 bps
higher NIMs during 1HFY11, as compared to FY2010 NIMs. Also, our earnings already factor NIMs
to decline in FY2012 by about 10 bps to 2.8% (calc). 

Logical to expect lending rate hike as well; credit growth is also picking up 
We believe SBI will also raise lending rates in due course. Even in the past, lending rate hikes have
followed deposit rate hikes. Further credit growth has just started to pick up – bankers have been
highlighting that credit growth has been firm during recent times and is getting more diversified.
We believe pricing power remains with bankers on the back of steady loan demand coupled with
tighter liquidity in the system

Earnings impact limited as strong levers available 
We believe SBI has multiple levers to deliver over 20% earnings growth and RoAs of 1%
despite NIM pressure in FY2010-12E, mainly from better operating leverage and lower loan
loss provisions. A cost-income ratio of 47% and opex/assets at 2% has scope for further
improvement as the bank has completed near-term investments in branches, technology and
employees. 2HFY12 would see loan loss provisions to ease as the bank reaches 70%
provision coverage ratios as mandated by RBI. Also, strong improvement in the underlying
economy would also see lower slippages and higher recovery cycle resulting in lower loan
loss provisions (we are building FY2012 loan loss provisions to remain at FY2011 levels).

SBI: Deposit Rates – 100 bps Hike:: Morgan Stanley

India Financial Services
Deposit Rates – 100 bps Hike
Quick Comment – What’s new: State Bank of India
has raised deposit rates by 50-150 bps across maturities.
In the 1-2 year bucket (using 555-day deposit as
benchmark) SBI has increased rates by 100 bps. No
changes in prime lending rates / base rate have been
announced as yet.  SBI’s rate increase follows increases
by other entities during the past week 



Pace of increase was a surprise: While we were
building in deposit rates to increase at about 50 bps per
quarter – the pace of the increase (+100 bps) was
sharper than expectations. Historically, we have not
seen such a sharp in increase at one go by SBI.

Margins to normalize going forward: Over the last
few months Indian banks were benefitting from higher
lending rates, lag in feeling the impact of higher deposit
rate and higher LD ratio. However, now NIM’s are close
to peak levels and ready to normalize. We expect NIM’s
to come down (though likely to stay higher than historical
average) – today’s rate hikes don’t have a material
impact on our numbers. These rates will flow through
earnings over next 12 months and we will not be
surprised if the bank increases lending rates by then.

Our numbers will be affected if banks raise deposit rates
further without touching lending rates. 

Why didn’t the bank raise lending rates – As we have
mentioned in our previous notes, historically banks used
to raise deposit rates and touch lending rates with a lag
of 3-6 months (loans are floating rate while deposits are
fixed rate). In this cycle, SBI raised lending rates along
with deposit rate, till now – probably to ensure adequate
revenue momentum to meet higher credit costs. Now
with NIM’s at 3.4% and rising, it can afford to revert to
old style rate hikes. Exhibit 10 shows how banks with
strong funding had seen lending spreads expand during
last rate hike cycle.


Why a sharp increase in deposit rates? Deposit growth in
India continues to lag credit growth owing to low real deposit
rates – hence incremental credit-deposit ratio both on trailing
3M and 1 yr basis have been elevated. This is also reflected in
the tight-interbank liquidity conditions. The sharp increase
announced today would have likely been driven by the fact that
we are entering the “busy” season in terms of credit growth and
banks may be looking to raise deposits ahead of the same.
How many more deposit rate hikes?  We expect another 50
bps deposit rate hike (over 3-6 months) and about 75 bps PLR
hike (over next 6-9 months). While the first reaction on seeing
the 100 bps rate hike is to think that rates are going to rise
sharply, history provides some perspective. The last time SBI
was offering around 8.5% on 1 year deposits (April 2008), repo
was at 7.75% (6.25% right now), CRR was 7.75% (6% now),
crude was US$ 115/barrel, WPI inflation was at 8% and rising
to 11.2% by July. Unless inflation goes awry, we are likely
coming close to the end of higher deposit rates.

Near term pressure likely, buy liability franchises – We
continue to prefer strong liability franchises. Stocks could be
under pressure in the near term especially until liquidity
conditions improve. In this environment, we continue to prefer
HDFC Bank and State Bank of India wherein the strong liability
franchises will provide an offset and revenue growth will
continue to be robust. 

We have also liked asset aggregators but given the pressure
on liquidity stock performance is likely to be weak in the near
term. However, we would look at buying on weakness as we
expect these stocks to do well in 2011.