Buy SBI; target of Rs 2600: Motilal Oswal

Motilal Oswal`s research report on State Bank of India

“In 4QFY13, bank restructured loan of INR87.7b (83b of loans), of which INR5.7b was already classified as NPA. Of the incremental restructuring, three large accounts formed INR34.9b. Consequently, standard restructured loan portfolio stood at INR322.3b (3.1 percent of loans) and net stress loans as a percentage of overall loans was at 5.2 percent as compared to 5 percent a quarter ago - one of the lowest in the industry. Net stress additions (change in standard restructured loans + net slippages) for the quarter stood at INR85.3b v/s INR72.8b in 3Q and quarterly average of INR85.9b in 1HFY13. Of the standard restructured loan, highest contribution comes from power - INR53.7b (16.7 percent of standard restructured loans; and 9.3 percent of funded exposure this segment) largely led by restructuring of two large accounts during the quarter. This is followed by iron and steel INR52.6b (16.3 percent of standard restructured loan; and 8.2 percent of funded exposure in this segment), and textile segment INR27.9b (8.7 percent of standard restructured loan and 6.1 percent of funded exposure in this segment). Restructuring pipeline is at INR58b (large corporate - INR30b and mid-corporate of INR28b), which excludes restructuring of SEB (TNSEB of INR35b (NPV loss of INR560m) - already restructured in 1QFY14 and UP SEB of INR9.8b)."

“Pressure on margins (core NIM down 20bp vs reported 50bp in FY13), and lack of fee income opportunities is leading to weak operating performance. This coupled with higher credit cost has led to downgrade in operating profit and PAT estimates by 6 percent and ~13 percent for FY14-15. Fresh restructuring during the quarter came in as a negative surprise, however helped by insignificant net slippages and improvement in PCR, overall rise in net stress loans was contained. Restructuring pipeline of INR103b (including SEB restructuring of INR45b) is a concern. For FY14 we factor net slippages of 1.5 percent and credit cost of 1 percent as compared to 2 percent and 1.2 percent in FY13. SBIN has consistently delivered RoA's of 0.9-1 percent, in different phases of economic cycles.”

“We expect core operating performance to be under pressure (due to NIM pressure, weak fee income growth and lack of operating leverage opportunities in the near term), healthy trading gains would translate into RoA's of ~0.9 percent over FY14/15, despite factoring higher credit cost. RoEs are expected to be lower at 14-15 percent over FY14-15. Improvement in macro-economic environment coupled with 1) strong liability franchise, (2) lowest NSL and (3) strong capitalization could see retracement of valuation multiples. The stock trades at 1x/0.9x FY14/15 Consol BV of INR2,006/INR2,256 and 7.7x/6.8x FY14/15 consol EPS of INR269/INR308. Maintain Buy with a target price of INR2,600 (1.1x FY15 con BV+INR115 for Ins),” says Motilal Oswal research report. 

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