Buy SBI; target of Rs 2637: Angel Broking

Angel Broking`s research report on State Bank of India

“SBI reported a moderate operating performance for 4QFY2013, as its NII and operating profit declined by 5.3 percent and 19.1 percent yoy, respectively, which was in-line with our estimates. The bank provided around Rs950cr for wage revisions during the quarter, and hence, operating expenses expectedly increased by 20.3 percent yoy. The bank witnessed a sequential decline in its gross NPA levels, on the back of sequentially lower slippages and higher recoveries/upgrades. The bank chose to improve its PCR (up by 509bp qoq) and hence, provisioning expenses came in much higher by 33.1 percent yoy and earnings declined by 18.5 percent yoy.”

“During 4QFY2013, the bank’s advances grew by 20.5 percent yoy, while deposits registered a growth of 15.2 percent yoy. Advances growth was on account of strong 40.4 percent yoy growth in large corporate book (12.1 percent qoq) and a healthy 18.8 percent increase in SME advances. Growth in saving deposits was moderate at 15.3 percent yoy, while current deposits increased moderately by 12.5 percent yoy. Domestic NIM were lower by 15bp sequentially, on account of 21bp sequential fall in its yield on advances, which was primarily on account of aggressive pricing for better quality lending (almost 90 percent of the incremental lending in mid and large corporate, was above investment grade) and interest reversals on slippages. Non-interest income (excluding treasury) remained flat on a yoy basis, even that was largely aided by a strong growth of 41.8 percent yoy in forex income and 31.2 percent yoy in ‘others’ segment, as fee income declined by 8.1 percent yoy. Treasury income came in at Rs229cr as against a treasury loss of Rs26cr in 4QFY12. On the asset-quality front, the annualized slippage rate came in at 2.7 percent, lower sequentially from 3.8 percent in 3QFY2013. Almost 70 percent of the incremental slippages came from the mid-corporate and SME segments. Recoveries/upgrades came in much healthy at Rs5,718cr compared to Rs2,797cr in 3QFY2013. Hence, on a sequential basis, gross NPA levels came lower by 4.2 percent. PCR improved by 509bp sequentially to 66.6 percent and absolute net NPA levels declined by 13.5 percent sequentially. Additionally, the bank restructured advances worth ~Rs8,670cr during the quarter (Suzlon and Sasan Power being the major ones), thereby taking its outstanding restructured book to Rs43,111cr.”

“The bank’s asset quality has witnessed elevated pressure for quite some time now, but the pressures appear to be moderating. Even going forward net slippages are expected to stabilize in-line with peers, as the economic cycle gradually improves. However, at the current market price, the stock is trading at 1.2x FY2015E ABV (adjusting for value of subsidiaries 1.0x FY2015E ABV) vis-à-vis its historic range of 1.3–2.3x and median of 1.6x. Also, considering the bank’s dominant position and reach, healthy fee income and superior earnings quality, we recommend a Buy rating on the stock with a target price of Rs2,637,” says Angel Broking research report.   

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