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Credit growth to slow down further: Although India’s largest lender
continued to gain in market share in domestic advances by 40 bps over
the past two years, its overall credit growth was lower than that of its
peers as it significantly slowed down its international business. We
expect it to start losing market share even in domestic segments as the
new management has indicated its preference to maintain NIMs over
business growth. Moreover, its lower Tier-I capital of 6.9% and very
high CDR of 81% are both major hindrances to any substantial credit
growth.
NIMs to moderate: NIMs have elevated to 3.2% in FY11 from 2.6% in
FY10 as cost of deposits decreased by 63 bps. It has a very high CASA
of 48.7%, which while providing a hedge to NIMs presently, will be
difficult to maintain at such high levels in an increasing interest rate
scenario. We believe such NIMs are unsustainable and see them settling
at 3.1% for FY12-13, as against the management’s expectation of a
slight improvement. Impact of increase in saving deposit rates will be
highest on SBI as its saving deposit proportion of 35.4% is highest in
the industry. Significant downside in NIMs is however unlikely as it reprices
its Rs65 bn high cost 1,000-day deposit raised in FY08-09.
Asset quality trends remain uncertain: Slippage has spiked to 2.6%
in FY11 as compared to 2.0% in FY10. The cleanup act undertaken by
the new management and system based NPL recognition is adding to
the uncertainty. Gross NPA has increased by only 30 bps to 3.3% as it
did large write-offs in the fourth quarter. We expect slippage to ease to
2.2% for FY12-13E, which is still a fairly high number. Credit cost will
remain high to achieve provision coverage in line with statutory
requirements from current 62.2%. High restructured book of 4.5% and
NPAs touching 15% of restructured book remain substantial worries.
Valuation: At the CMP the stock is trades at 13.9x and 11.5x FY12E
and FY13E earnings, and at 2.1x and 1.9x P/ABV FY12E and FY13E
respectively. Stripping out value for subsidiaries it is trading at 8.9x P/E
FY13E and 1.5 P/ABV FY13E. Concerns of asset quality, low Tier-I ratio
constraining balance sheet growth and compression in ROE after the
equity issue will continue to be an overhang on stock. We expect ROA
of 1.0% and ROE of 15.3% in FY13E. We initiate coverage with a HOLD
rating with a price target of Rs2,235 per share. We value it on SOTP
basis on P/ABV of 1.3x FY13E for the parent and Rs540 for subsidiaries.
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