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S tate Bank of India
Most leveraged to rate hikes,macro
Where we are
While SBI has outperformed the market by 8% (up 19% YTD), it has
underperformed by c.12% the past month on concerns ranging from interest rate
(deposit) hikes leading to margin contraction and asset quality issues including
exposure to MFIs, telcos and real estate. We believe the price reaction is
overdone as the exposure to these sectors is <6% of loans and that too mostly to
top players. Moreover, we believe asset quality still remains very manageable and
see stabilizing of NPL levels in the ensuing quarter and an improvement from 4Q.
Where we are going
We believe SBI, like many government and private banks, is also likely to hike its
lending rates soon (in Jan’11) given the likely uptick in loan demand and pricing
power with banks. SBI is the biggest beneficiary of a hike in lending rates owing to
ALM mismatch. That coupled with expected improvement in asset quality through
CY11 and ~20% loan growth is likely to underpin the stock performance through
CY11. Moreover, we estimate earnings growth to be +25/45% in FY11/12 driven
by top line (rising margins) and fees, taking ROE to +20% by Mar’12.
Investment conclusion for 2011
SBI remains among our preferred picks as it is most leveraged to improving
macros. We believe the stock, now trading at 1.7x FY12E (banking business), can
trade up to +2.3-2.4x FY12E adj. book value on 1) improving asset quality, 2)
strong earnings visibility, of 26/45% for FY11/12, and 3) RoE for banking business
rising to +21%. Risk-return remains favorable even if it does a rights issue (12-
15% dilution). Non-bank subs add Rs283/ share, incl. Rs177 from life insurance.
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