Part of SBI arms’ worth to go to provide for stress book

SBI did not disclose financials and asset quality for the subsidiaries, but we imply the performance from the consolidated financials . SBI’s stand-alone Gross NPA of 7.2% and consolidated Gross NPA of 9.1% implies a 17.5% Gross NPA for the associate banks from ~14.5% NPAs in Q3FY17.

The associate bank’s NPA performance implies a net slippage of Rs 137 billion in Q4FY17 which is 4.5% of loans, and this is after a recognition of ~10% of loans as NPAs in 9MFY17 leading to total net slippage of ~15% in FY17.

Gross NPAs plus FY17 write-offs and watchlist for subsidiaries are Rs 832 billion in our estimate, which is 22% of opening FY17 loans vs 11% of total stress for SBI stand-alone. We estimate a PBT loss of Rs 75 billion for the associate banks in Q4FY17 and a total of Rs 150 billion of loss in FY17. This is ~40% of FY16 net worth of all associate banks. We estimate provisions of Rs 88 billion taken in Q4FY17 which was largely used to write off loans (Rs 84 billion) leading to a drop in reported coverage for associate banks v/s Q3FY17.

As the associates will be merged with the parent bank from Q1FY18, ideally it is best to look at the consolidated P&L for SBI now. Given such high stress, we find it difficult to look forecast stable operating profit for the subsidiaries; hence, we would prefer to value the banks and associate banks separately. Figure 4 shows that a large part of the Rs 215 billion of net worth of associate banks would go in providing for the stress book and hence contribution of associate banks to SBI’s SOP could fall to ~Rs 10/share.

While subsidiary performance was a big miss, SBI stand-alone performance was largely in line with a PAT of Rs 28 billion (our estimate of Rs 44 billion) coupled with a big improvement in provision coverage (up 500bps q/q). Adjusted for higher other interest income NII/PPOP was largely in-line with some weakness in fees being netted off by lower opex.

Slippages were largely in line with our expectations both on gross and net basis. Of the total slippages of Rs 104 billion, Rs 54 billion was from the watch list leading to a reduction in watchlist to Rs 133 billion. For the full year, watch list slippages were ~45% of total slippages.