See SBI's FY13 book value around Rs 1365, says Nomura

India's largest lender State Bank of India (SBI) declared its fourth quarter results on Friday. The bank reported a net profit of Rs 4,050 crore as against Rs 21 crore a year ago.

In an interview to CNBC-TV18, Vijay Sarathi, banking analyst at Nomura says, the net interest income was in line with his numbers. “But non interest income was ahead of our estimates because of better than expected forex and ofcourse there were dividends from subsidiaries as well,” he adds. The key surprise, he says, was gross non-performing loans (NPLs). He has a target price of Rs 2,400 on the stock. “Our book value for FY13 is about Rs 1,365,” he adds. Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video. Q: What were your key takeaways from the SBI numbers? Have you changed your earnings estimates and your price targets since Friday? A: Net interest income was in line with our numbers. But non interest income was ahead of our estimates because of better than expected forex and ofcourse there were dividends from subsidiaries as well. The key surprise was gross non-performing loans (NPLs). They have declined sequentially. This has happened after three years. Slippages numbers were way better than expected. While the market was expecting much lower number compared to the third quarter, I think Rs 44 billion in slippages for the quarter were better than everybody’s expectations. In terms of looking ahead, we are yet to revise our numbers for FY13. Q: What is your new price target and the new book value or earnings estimates that you have for FY13 and FY14? A: We had gone from ‘buy’ to ‘neutral’ about a month back primarily because of macro consensus on currency depreciation etc. We have a current target price of Rs 2,400 on the stock and our book value for FY13 is about Rs 1,365. Q: Through the course of this calendar year or next, do you think SBI will need to raise any fresh capital? What do you think they might have to do in order to do that in terms of whether they have to go down the equity route? A: No. After the Rs 7,900 crore that they have got on March 30, I think even for Basel III requirements the management did talk about their comfort levels. Till FY15, I don’t think they are looking to raise any further capital. But FY15, when the capital conservation buffer kicks under Basel III, that is when they will look to raise capital. In all, I think they would need something like Rs 98,000 crore in total capital over the next four-five years or so. Q: What is the gap that you have accorded at this point between SBI and a couple of the other private sector names? Do you think that gap will get closed over this year in terms of valuations? A: No. I think the valuation gap between private and public sector will remain primarily because of structural issues that public sector banks face. But I think in terms of its own trading level, SBI at the current level trades at about 1.1 times FY13 book value. Our target price implies 1.5 times. That is at a discount to its historical levels of 1.7-1.8. We must note that structurally we are talking about some headwinds for the banking sector atleast over the next one year in India, primarily because we are not seeing any significant corporate capital spending coming through. That is going to weigh on loan growth. Secondly, deposit competition is also going to be intense. At the macro level, currency, fiscal deficit, current account deficit are issues that we have to deal with. So, we do not expect the banks, both private sector and public sector banks to trade back to their historical multiples. Q: The concern is that while asset quality did improve in the current quarter because of the restructuring that the public sector banks like SBI doing, they will start cropping up and affecting numbers and asset quality during the course of the year. Do you think that is an over blown concern or a legitimate one? A: No. I think we have clearly not in a position to say that asset quality problems are behind us. But if you look at on a sequential basis, the situation now is atleast marginally better than what it was couple of quarters back. I think banks specific issues need to be dealt with. Even if you look within the public sector banks, SBI has had a decline sequentially in Q4 of their gross NPLs, whereas both the other two large banks like Bank of Baroda and PNB have had an increase. One thing clearly is asset quality problems are not clearly behind us, till the macro situation improves and corporate profitability improves. Q: What are you telling your clients to do on some of these non frontline private sector banks like IndusInd and Yes bank? A: We like IndusInd Bank. We have a target price of Rs 400 because we think the earnings profile should be fairly stable for the company. Also, I think for them, given the nature of their book, net interest margin should improve over the next one year from the 3.25% that they reported in Q4. Yes Bank, we currently have a ‘neutral’ rating. The stock has taken quite a beating but tactically at the current levels people should look to buy.