Buy SBI; target of Rs 2725: Motilal Oswal

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Buy SBI; target of Rs 2725: Motilal Oswal

Motilal Oswal is bullish on State Bank of India (SBI) and has recommended buy rating on the stock with a target of Rs 2725 in its February 14, 2012 research report.

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Motilal Oswal is bullish on State Bank of India (SBI) and has recommended buy rating on the stock with a target of Rs 2725 in its February 14, 2012 research report.

"State Bank's (SBIN) 3QFY12 PAT stood at INR32.6b, 3% higher than est. Strong margin performance leading to higher than expected NII growth of 27% YoY, was offset by steep decline in other income. However, lower provisions boosted bottom-line."

"NIMs improved 26bp QoQ to 4.05% led by increase in domestic NIM of 32bp QoQ. Yield on loans (+10bp QoQ; calc.) outpaced increase in cost of deposits (+4bp; calc.), leading to margin accretion. Gross slippages remained elevated at INR81.6b v/s INR82.7b in 2QFY12. Corporate segment slippages of INR39.5b formed 48% of overall slippages, followed by SME segment (INR21b, 25% of overall slippages). In 3QFY12, SBIN restructured loans worth INR21.8b resulting into gross restructured book of INR376b (4.4% of loans). Of which cumulative slippages stood at INR97b. Non-interest income at INR21.3b was well below est. due to large trading loss of INR10.6b reported on equity portfolio. Fee income growth remained muted at 7% YoY and 2% QoQ to INR26.5b. Gross loans grew 7% QoQ (up 17% YoY), while deposits increased 3% QoQ (up 14% YoY). On domestic operations, CD ratio improved sharply by 280bp QoQ to 78.6%."

"SBI has delivered strong performance on global margins (+26bp QoQ and +98bp over past three quarters) yet again, with domestic margins at 4.4% - one of the best in the industry. Higher yield on loan and containment of cost of deposits led by high CASA mix (47.5% - one of the best in the industry) and shedding of bulk deposits (now at 12% of overall deposits) is leading to strong margins performance. Management remains confident of maintaining/ improving margins at current levels, however on a conservative basis guided for margins of 3.75%+ as against 3.8% in 9MFY11 and 3.3% in FY11. We model 55bp improvement in margin for FY12 - (highest amongst peers), but expect it to decline 10bp in FY13 in a falling interest rate scenario. Healthy loan growth and strong margin will translate into NII CAGR of 22% over FY11-13. While high slippages and disappointing performance on recoveries and up-gradation have increased the concerns about high stress in the balance sheet, high margins and improvement in fee income (as the base correction would have been over) in FY13 provides strong cushion in the balance sheet to provide for higher credit cost. Improvement in up-gradations and recoveries would be critical to provide impetus to improvement in asset quality. We model slippage ratio of ~4% and 3.6% for FY12 and FY13. Our credit cost estimates remain conservative at 130bp (excluding one offs at 105bp) for FY12 and 110bp FY13 (120bp in FY11). Absence of one off provisioning (INR25b) and higher base of MTM provisions (INR7b) will provide strong cushion to earnings in FY13. One off provisions also led to higher tax rate, which will decline in FY13."

"We expect PAT CAGR of 27%+ over FY11/13 - one of the highest amongst peers. While core operating performance remains strong, higher stress on asset quality has been a key concern. SBIN remains highly leveraged to improvement in asset quality and fall in interest rates. We expect standalone RoE of 16.4% for FY12 and 17.1% for FY13 (without assuming capital raising). Standalone RoA is expected to improve from 0.7% in FY11 to 0.9% in FY12-13. Stock trades at 1.3x FY12 Consol BV of INR1,522 and 1.2x FY13 consol BV of INR1,763. Maintain Buy with target price of INR2,725 (1.5x FY13 Cons BV + INR87 for insurance)," says Motilal Oswal research report. 

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To read the full report click on the attachment