Buy SBI; target of Rs 310: Geojit BNP Paribas

Geojit BNP Paribas' research report on SBI

Net Interest Income (NII) increased marginally by 1.3% YoY as the bank’s net interest margin (NIM) declined by 22 bps YoY to 2.8% on the back of a sharp decline in yield on loans due to higher non-performing loans (NPLs) and incremental disbursements to low yielding corporates. However, operating profit of the bank increased by 9.3% YoY helped by one off fee income of Rs 800 cr (service tax refund) and higher trading gains (↑53.4% YoY). However, the bank prudently used this one-off gain to make higher provisions at Rs 7,897 cr (↑81.1% YoY). Further, the bank also has countercyclical provisions of Rs 11,500 cr. Going forward, we expect net profit to increase at a strong CAGR of 34.7% over FY16-18E supported by decline in credit cost to 1.5% in FY18E from 2.0% in FY16.

We expect the asset quality trend to improve gradually over the next few quarters which will translate to strong bottom-line growth (34.7% CAGR over FY16-18E). Overall, we believe that SBI is best placed among PSU banks to capitalize on growth opportunities owing to its strong capital base. Further, we have not factored in the positive impact of demonetisation on SBI’s earnings which can be substantial. Hence, we continue to maintain BUY rating with a revised upwards TP of Rs 310 using sum of the part (SOTP) methodology, where we value its standalone business at Rs 260 (P/ABV of 1.6x for FY18E) and subsidiaries at Rs 50. (Previous TP: Rs 284).