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State Bank of India -Time to add
§ Upgrade to BUY - system illiquidity should ease in the near term
§ Recall our sector downgrade in October 2010 on tight liquidity
§ Valuation looks attractive despite NIM squeeze & increase in LLP
§ Trades at 1.5x FY12E adjusted BV for adjusted ROE of 17.6%
Why the upgrade now
We see our earlier concern – lack of liquidity in the system – correcting itself
gradually (recall our downgrade of the sector; see our note “Time to book profit”
dated 8 October 2010). Deposit growth has been inching up on higher rates and
government spending will slowly recycle government surplus back into the system.
We believe SBI’s current valuations largely, if not fully, price in the expected
margin contraction and possible sectorspecific spike in credit cost.
What has changed in the sector and FY12 outlook
We downgraded SBI in October on concerns about a widening gap
between credit growth and deposit growth and, consequently, tight
liquidity in the system driving up funding costs. We have seen this thesis
play out so far, with the loan-to-deposit ratio (LDR) looking very stretched
for all major banks (see Exhibit 3 for SBI’s historical and incremental
LDR). Deposit rates have increased by 200-300bp across the sector and
deposit growth has inched up from 14% levels in October 2010 to 16.4%
in early January 2011. This deposit traction, together with the expected
increase in government spending over the next 2-3 months, should
further ease the liquidity pressure in the system. In this context, we are
building in NIM contraction for FY12 and an increase in loan-loss
provision (LLP) to account for the possible credit-cost spike. We upgrade
to BUY (from Hold), as we find valuations attractive. We estimate SBI will
have to disburse loans worth INR334b (or 4.6% q-q growth) in 4QFY11 to
meet our loan growth estimate of 21% for FY11. We are factoring in NIM
compression of 30bp over the next 2-3 quarters, from the 3QFY11 level
of 3.6%, on account of a higher proportion of low yielding priority sector
loans in 4Q and a further pass-through of higher funding costs. We
assume LLP of 104bp for FY11, vs 88bp in FY10. For FY12, we estimate
loan growth of 21%, NIM of 3.3% and LLP of 97bp. We are factoring in a
rights issue of INR100b in 1QFY12, although management has not
indicated a specific timeline for this.
Valuation
We cut our target price for SBI to INR3,000.00 (from INR3,350.00) to
reflect the earnings revisions. Our TP is based on a three-stage residual
income model, which assumes a risk free rate of 8.3%, equity risk
premium of 6%, terminal growth rate of 4% and beta of 1.2. At our target,
the stock would trade at a FY12E P/BV of 1.8x (earlier 2x). SBI is trading
at 1.5x our FY12E adjusted book value for adjusted ROE of 17.6%. Risks
to TP: higher-than-expected NIM compression and LLP.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
State Bank of India -Time to add
§ Upgrade to BUY - system illiquidity should ease in the near term
§ Recall our sector downgrade in October 2010 on tight liquidity
§ Valuation looks attractive despite NIM squeeze & increase in LLP
§ Trades at 1.5x FY12E adjusted BV for adjusted ROE of 17.6%
Why the upgrade now
We see our earlier concern – lack of liquidity in the system – correcting itself
gradually (recall our downgrade of the sector; see our note “Time to book profit”
dated 8 October 2010). Deposit growth has been inching up on higher rates and
government spending will slowly recycle government surplus back into the system.
We believe SBI’s current valuations largely, if not fully, price in the expected
margin contraction and possible sectorspecific spike in credit cost.
What has changed in the sector and FY12 outlook
We downgraded SBI in October on concerns about a widening gap
between credit growth and deposit growth and, consequently, tight
liquidity in the system driving up funding costs. We have seen this thesis
play out so far, with the loan-to-deposit ratio (LDR) looking very stretched
for all major banks (see Exhibit 3 for SBI’s historical and incremental
LDR). Deposit rates have increased by 200-300bp across the sector and
deposit growth has inched up from 14% levels in October 2010 to 16.4%
in early January 2011. This deposit traction, together with the expected
increase in government spending over the next 2-3 months, should
further ease the liquidity pressure in the system. In this context, we are
building in NIM contraction for FY12 and an increase in loan-loss
provision (LLP) to account for the possible credit-cost spike. We upgrade
to BUY (from Hold), as we find valuations attractive. We estimate SBI will
have to disburse loans worth INR334b (or 4.6% q-q growth) in 4QFY11 to
meet our loan growth estimate of 21% for FY11. We are factoring in NIM
compression of 30bp over the next 2-3 quarters, from the 3QFY11 level
of 3.6%, on account of a higher proportion of low yielding priority sector
loans in 4Q and a further pass-through of higher funding costs. We
assume LLP of 104bp for FY11, vs 88bp in FY10. For FY12, we estimate
loan growth of 21%, NIM of 3.3% and LLP of 97bp. We are factoring in a
rights issue of INR100b in 1QFY12, although management has not
indicated a specific timeline for this.
Valuation
We cut our target price for SBI to INR3,000.00 (from INR3,350.00) to
reflect the earnings revisions. Our TP is based on a three-stage residual
income model, which assumes a risk free rate of 8.3%, equity risk
premium of 6%, terminal growth rate of 4% and beta of 1.2. At our target,
the stock would trade at a FY12E P/BV of 1.8x (earlier 2x). SBI is trading
at 1.5x our FY12E adjusted book value for adjusted ROE of 17.6%. Risks
to TP: higher-than-expected NIM compression and LLP.
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