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State Bank of India |
Improving earnings; slippages remain high |
REDUCE
CMP: Rs3,423 Target Price: Rs3,000
n SBI’s net profit at Rs25.0bn, lower than our estimates driven by higher than expected provisions for the merger of State Bank of Indore (SBIndore)
n Operating performance strong with NII growth of 45% (Rs81bn), operating profit growth of 31.5%. Other highlights (1) CASA at 47% and (2) fee income growth of 22% qoq
n The slippages continue to remain high at Rs44.1bn for the quarter (Rs41.6bn excluding agri relief NPAs). Provision expenses to remain high at Rs18-19bn in coming quarters
n We are upgrading FY11E/FY12E estimates by 5.2%6.2% each. ABV estimates upgrade by -2%/+1.4%. Maintain REDUCE with TP of Rs3,000 (1.8x consolidated ABV + subsidiary value)
Valuation and view
Our underlying argument for negative stand on the stock remains valid with gross slippages
of Rs44.1bn (1.9% for FY10). We are upgrading FY11E/FY12E estimates by 5.2%6.2%
each. However, the change in ABV estimates is by -2%/+1.4% due to change in slippage
assumptions.
At CMP, the stock trades at 3.4x/2.8x and 2.8x/2.2x FY11E/12E standalone/consolidated
ABV. Since, our last note on banking sector, “PSU Banks - shifting valuation base up”
dated August 18, 2010, the valuations of all large PSU banks have moved up by 20% on
P/ABV basis and so is the case with SBI. We are raising our P/ABV multiple for SBI
consolidated banking operations to 1.8x and raising our TP of Rs3,000 (including subsidiary
value). We have not included the impact of rights issue in our numbers which can add
another Rs133/share to ABV implying an upside of 7% to our target price. We maintain our
REDUCE rating on the stock.
We continue to prefer BOB and PNB amongst the large PSU banks driven by their superior
RoEs (20-22%) and comparably reasonable valuations (1.8-1.9x FY12E ABV)
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