State Bank of India’s consolidated third-quarter 2016 earnings declined by 60% over the prior year, on account of higher provisioning and bad-loan recognition by the bank after the recent banking system review by the Reserve Bank of India, or RBI. However, on a nine-month basis, earnings were down just 6%. On account of prudential recognition, SBI has undertaken higher provisioning against loans given to large steel and textile companies, which have yet to cross the 90-day nonpayment hurdle that otherwise classifies them as bad loans. At the stand-alone bank, gross nonperforming advances jumped to 5.1%, from 4.2% in the September quarter. On a nine-month basis, provisions increased by 17% and loan losses increased by 14%. In view of these higher provisions, we increase our 2016 consolidated provisions to INR 360 billion, up from INR 270 billion, and decrease our earnings estimate to INR 130 billion, from INR 197 billion, as management guides to higher provisions in the March quarter. Despite higher provisions, the bank remains adequately capitalised, with a 12.45% capital adequacy ratio and 9.6% Tier 1 capital, with plans to raise additional Tier 2 capital in the coming quarters.
Our consolidated 2016 estimate is INR 17 earnings per share, versus INR 26 previously. We retain our explicit forecast from 2017 to 2020, and the negative impact of this earnings adjustment on our fair value estimate is less than 5%. We maintain our INR 334 per share fair value estimate for the stock, which trades below its stand-alone book value of INR 178 per share, as of December 2015, and below our estimated INR 229 per share for March 2016. We recommend this narrow-moat stock, which trades in the 5-star range, to investors with a long-term horizon and relatively higher risk appetite to build a position in high-uncertainty stock. We are modestly adjusting our GDR valuation to $49 from $51 per GDR as we adjust the valuation for a 3% depreciation in the USD/INR exchange rate.
