Buy SBI; target of Rs 360: KRChoksey

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

SBI reported meek core operating metrics heightened by lower provisions, resultant a PAT of Rs 3,692 crs up 10.3% Y-o-Y, above our estimates. Key highlights: 1) NII depicted a weak growth of 3.6% Y-o-Y and declined by 6.7% Q-o-Q owing to a slack in credit growth and drop in margins 2) Non-interest income grew modestly by 19.7% Y-o-Y driven by healthy fee income and treasury gains, although posted a decline of 40.2% Q-o-Q due to seasonality and sequentially lower treasury gains 3) Employee costs were well controlled and grew by 6.1% Y-o-Y, while other operating expenses grew by 17.8% Y-o-Y owing to a change in depreciation method, branch expansion and upgradation of branch connectivity 4) Fresh slippages increased to Rs 7,318 crs, up by 53.4% Q-o-Q primarily due to seasonality witnessed in the retail book and some stress in SME and mid corporate segments 5) Asset quality remained fairly contained during the quarter with gross and net NPA ratios at 4.3% and 2.2% respectively with coverage ratio of 69.5% (up 36 bps Q-o-Q). While standard restructured assets increased to 4.4% of loans from 4.3% in the previous quarter 6) Advances depicted a modest growth of 6.8% while deposits grew by 13.7% Y-o-Y.

Valuation & Recommendation: "SBI has reported weak core operating performance during the quarter. NII growth was subdued owing to slow credit movement and weak margins, with modest fee income growth, while contained asset quality lower provisioning are key positives from the result. We believe improving macros and a pickup in investment cycle would aid in improving asset quality outlook, facilitate better deployment of excess liquidity and support margins which in conjunction with controlled overhead costs would improve core profitability. We believe better capital position among PSU banks, strong deposit franchise and lower stressed assets are key differentiators for SBI. Currently the stock is trading 1.1x FY17 core book and 8.2x FY17 core earnings, finding favorable risk reward. We recommend “BUY” rating on the stock revised TP of Rs 360", says KRChoksey research report.

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