State Bank of India: Buy says Business Line,

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State Bank of India: Buy

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INVESTMENT FOCUS

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Fresh investments can be considered in the State Bank of India (SBI) stock that, after a 17-per cent correction, provides a good buying opportunity. Being a market leader, SBI may continue to be a major beneficiary of the credit growth which typically picks up during the second half of the year. The bank has steadily gained market share (currently 17.03 per cent) over the last two years as advances swelled, mainly through increased focus on retail lending.

At the current price of Rs 2,858, the stock is trading at 2.45 times its estimated standalone FY11 book value and 17.8 times FY11 earnings. On a consolidated basis, the price-to-book value ratio works out to two times its FY11 book. Investments in the NSE and UTI Mutual Fund, which are valued at cost, understate book value. At this valuation SBI is trading at a justified premium to all public sector banks. SBI may tap the markets in the latter part of this fiscal to bolster its capital adequacy ratio now at 13.2 per cent.

Even if its credit growth just matches industry's, SBI's low borrowing costs will help it manage core earnings growth that is superior to other banks'. It has managed a 3.43 per cent net interest margin for the quarter ended September 2010 thanks to improved credit-deposit ratio and rising low-cost deposit proportion (48 per cent). High credit-deposit ratio (74 per cent) and sustained fee income growth (35.5 per cent during first half of FY11) are the other key positives for the bank. The rapidly growing branch network will allow SBI to sustain its low-cost deposit base and add to fee income, while driving retail loan growth. SBI has already been broad-basing its liabilities by raising longer term retail bonds and floating rate bonds.

Strong growth in pre-provisioning profits during the first half were offset by higher provisioning for non-performing assets. The current Gross NPA ratio of SBI is 3.35 per cent with around 14.5 per cent of the restructured assets going bad upto September 2010. Asset quality concerns may however bottom out in a couple of quarters owing to the revival in economy. The key risk though is the loan-loss provision which is at 62.8 per cent, below the 70 per cent mark required in one year. Even if there are no fresh slippages the bank may have to set aside more than Rs 2,250 crore over the next one year towards this provision.

SBI may maintain margins at current levels for a couple of quarters as the high credit-deposit ratio and a hike in lending rates may make up for rising borrowing cost. Re-pricing of loans is immediate while deposit hikes may take some time to filter through to overall cost of funds. The bank has been less aggressive in increasing the deposit rates than other banks as it shed excess bulk deposits.

M.V.S. Santosh Kumar

BL Research Bureau