Buy SBI; target of Rs 350: KRChoksey

KRChoksey's report on State Bank of India (SBI)

SBI reported a good set of numbers with PAT of Rs 3,742 crs, up 23.1% Y-o-Y, above our estimates. Key highlights: 1) NII grew 14.0% Y-o-Y and 6.8% Q-o-Q aided by sturdy margins 2) Non-interest income grew exceptionally by 29.3% Y-o-Y and 62.6% Q-o-Q owing to high trading gains (Rs 1,659 crs in Q4FY15 vs Rs 920 crs in Q3FY15), healthy fee income growth (+9.7% y/y) and high recoveries 3) Employee costs (24.4 y/y; +12.4% q/q) increased mainly due high provisions for pension and gratuity, while the increase in other opex (+18.7% y/y; 9.6% q/q) is mainly attributable to high ATM interchange charges 4) Fresh slippages dropped by 32.3% Q-o-Q to Rs. 4,769 crs due to controlled slippages in SME loans. The bank commendable improves recoveries and upgradations during the quarter to Rs 5,161 crs Vs Rs 667 crs in Q3FY15 5) Positively surprising gross and net NPA ratios improved to 4.3% and 2.1% respectively with coverage ratio of 69.1% (up 557 bps Q-o-Q). However total standard restructured assets increased to 4.3% of loans from 3.8% in the previous quarter as RBI’s restructuring norms roll-out 6) Advances and deposits grew by 7.5% Y-o-Y and 13.1% Y-o-Y respectively.

Valuation & Recommendation: "SBI has reported stable core operating performance during the quarter. Healthy NII growth, moderately stable margins, healthy fee income growth, robust trading gains and improving asset quality are key positives from the result. We believe improving asset quality outlook, better deployment of excess liquidity, lower credit costs and containing overheads will support margins and overall core profitability. We believe better capital position among PSU banks, superior margins; strong deposit franchise and lower stressed assets are key differentiators for SBI. SBI offers best macro recovery play given the diversified lending portfolio and superior ability to participate growth. At Rs. 282 the stock is trading 1.2x FY17 core book and 9.4x FY17 core earnings, finding favorable risk reward. We recommend “BUY” rating on the stock revised TP of Rs 350", says KRChoksey research report.

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