Accumulate SBI; target of Rs 194: Reliance Securities

SBI's Q4FY16 results has negatively surprised us on asset quality front impacted by higher slippages due to ongoing asset quality review (AQR) by the RBI. Its fresh slippages soared to Rs 303bn (at annualized ratio of 6.2%) in 4QFY16 v/s Rs 207bn (6.2%) in 3QFY16 & Rs 642bn (5%) in FY16 v/s Rs 294bn (2.4%) in FY15, which resulted in provisioning of Rs 131.7bn (up 99.8% YoY & 65.7% QoQ). SBI has also utilized Rs 11.5bn of Countercyclical Capital Buffer (CCyB) to provide for all-time high quarterly NPA. Despite elevated stress formation, it has been able to deliver relatively better operating performance compared to its peer due to 11.9% YoY & 31.4% GoG growth in core fee income and relatively better growth in balance sheet.

Though we continue to revere SBI’s core operating performance and business franchise, near-term headwinds have put substantial pressure on its asset quality, which is likely to persist in next 2-3 quarters along with elevated credit costs, keeping its RoAs & RoEs depressed at ~0.5-0.7% & ~7-10%, respectively over FY16-18E. Moreover, merger of associate banks will increase apprehensions over its operating performance and assets quality in the near-term. Hence, we revise our recommendation on the stock to ACCUMULATE from BUY with a revised SOTP-based Target Price of Rs 194 (Rs 178 earlier), valuing standalone bank at 1.1xFY18E adj. BV and subsidiaries at Rs 37/share after deducting holding company’s discount of 20%.For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.