SBI’s earnings for second-quarter 2016 were up 25%, on the back of a 35% increase in other income as a result of the repatriation of profits accumulated in subsidiaries abroad. The frequency of this repatriation is unclear based on management commentary, so we treat this as a one-time event for the year, including currency impact. Other income for the first half, however, was dismal, witnessing a 2% decline over the prior year. Keeping these results in mind, we are reducing our forecast of noninterest income growth to 13% for 2016, down from 17% previously envisaged. Operating profit for the quarter moved up by 21% for the stand-alone bank, with domestic net interest margins at 3.3%, loan growth at 9%, and deposit growth of 11%. Its retail portfolio grew faster at 16%. In comparison, retail-focused lenders such as HDFC Bank and Axis Bank continue to expand their loan books, at 29% and 23%, respectively. Given the size of SBI, growth at the bank closely reflects the system nonfood credit growth, which it matched at 10% for September-end. We adjust our deposit growth to 11% from 10% to match the bank's performance thus far; however, our loan growth estimate remains at 13%, as we anticipate that system growth will move up from 10% to 13% for the full year, somewhat lower than the guidance of 13%-14% from SBI's chairwoman.
With these changes to our 2016 forecast, and to adjust for the time value of money since our last update in March, we are increasing SBI’s fair value estimate by 6% to INR 334 per share, or $51 per GDR. Our GDR fair value estimate does not change much, due to the 6% devaluation in INR versus USD since our prior update. Our revised 2016 earnings estimate is INR 197 billion. As we incorporate the recent equity capital of INR 54 billion raised by the bank from the Indian government, which was less dilutive than anticipated, our 2016 earnings per share estimate remains unchanged at INR 26 per share for this narrow-moat stock.
We believe SBI is a Standard allocator of shareholder capital, despite sale of loans to assets reconstruction companies, or ARCs, and continual refinancing being the main line of questioning during the earnings announcement. This is quite unlike Kotak Mahindra Bank, which does not sell any loans to ARC and recognizes a bad loan as soon as a party defaults.
The recent equity raise from the government was only modestly dilutive to minority shareholders. This is not a concern from our perspective, as it is essential capital needed to beef up the bank’s Tier 1 capital for future loan growth.
