SBI an underperformer, target Rs 1523: Karvy

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SBI an underperformer, target Rs 1523: Karvy

Karvy Stock Broking has rated SBI as an under performer and expects target price of Rs 1523. The proposed merger would not have any incremental positive impact on the SBI standalone performance, but this is certainly a move in the right direction considering size and restructuring of the whole SBI banking group.

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Karvy Stock Broking has rated SBI as an under performer and expects target price of Rs 1523. The proposed merger would not have any incremental positive impact on the SBI standalone performance, but this is certainly a move in the right direction considering size and restructuring of the whole SBI banking group.

Karvy Stock Broking firm research report on SBI 

Proposed merger of State Bank of Saurashtra (SBS) with State Bank of India (SBI)

The boards of both SBI and SBS (SBI's 100% subsidiary) have approved to the proposed merger, now the matter would be considered by the central government and the central bank for their requisite approvals. SBS, a Bhavnagar based regional bank has concentration in Gujarat state accounting for approximately 86% of 452 branches and almost 64% of the branches in rural and semi-urban areas. As on March, 2007 the bank's deposits base was Rs158bn with lowcost deposits' share of 33.3%; rural and semi-urban areas contribute 31% of total deposits. The bank had total advances of Rs111 billion; priority, agriculture, SSI and retail sectors contributed 42%, 18%, 14% and 16% to net bank credit (NBC).

The bank's credit to rural and semi-urban areas has been in the range of 25-26%. SBS is the smallest SBI's associate bank with lowest margins and return ratios. The finance minister has been pushing the consolidation issue for a while, some months back FM had proposed consolidation of all un-listed SBI's associate banks but after strong opposition from the associate banks' unions he retracted. Cultural differences among the associate banks and fear of retrenchment were the main reasons for the opposition.

Now, SBI has put efforts to break ice with the smallest associate bank on implicit confirmation from the central government. Though, the merger would not have any incremental positive impact on the SBI standalone performance but certainly if the merger goes through smoothly, it could set an example for consolidation of other associate banks. Post proposed merger, we expect branch rationalization to take place in Gujarat state and some of the metro cities.

Valuation

The proposed merger would not have any incremental positive impact on the SBI standalone performance, but this is certainly a move in the right direction considering size and restructuring of the whole SBI banking group. We increase our price target from Rs1450 to Rs1523 due to upward revision in FY2009 estimates. We maintain our Under Performer rating on the stock with a target price of Rs 1523.