Buy SBI; target of Rs 350: P Lilladher

Prabhudas Lilladher's report on State Bank of India (SBI)

"SBIN reported mixed set of numbers with fresh slippages declining for the third quarter in a row coming out as a big positive. However, higher restructuring and bad loan sale to ARC diluted the performance. Revenue growth remains strong led by seasonally strong other income (up 29% YoY/63% QoQ), while NII growth adjusted for one-off (interest on tax refund) stood tepid, following modest loan growth. SBIN stepped up its NPL provisioning and sold bad loans to ARC leading to 68bps QoQ improvement in net NPL ratio, while coverage ratio also increased by 696bps QoQ to 51.4%. We are pleased with the improving trend in fresh slippages and note that adjusting for potential slippages from fresh restructuring and badloan sale, net stressed assets for SBIN has declined. We cut our FY16E/FY17E earnings to factor in slower business growth and higher credit cost. However, our target price stands unchanged at Rs350 as we roll-forward our valuations to Mar- 2017E ABV."

"We estimate SBIN’s RoA to improve gradually over the next two years as net NPLs have declined to more manageable level of 2.1% (from peak of 3.24% in Q3FY14), while prospects of further writedown on SR portfolio remains low, given hefty haircuts already taken and improved pricing discipline while selling bad loans to ARC following revised RBI regulations. We cut our FY16E/FY17E earnings to factor in slower business growth and higher credit cost but our target price stands unchanged at Rs 350 as we roll forward our valuations to Mar-2017E ABV", says Prabhudas Lilladher research report.

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