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„Moody’s downgrades SBI rating on low tier I & Asset Quality
Today, Moody’s Investors Service downgraded SBI’s financial strength rating
(BFSR), or stand-alone rating, to D+ from C- on lower tier I and asset quality
worries. However, the senior foreign currency bond rating remains at Baa2. The
report cites SBI’s lower tier 1 (at 7.6% as of June ’11) as hindering loan growth
and providing insufficient comfort in the case of potential higher credit costs as
reasons for downgrading. Per Moody’s, non-performing assets are likely to rise in
the near term due to higher interest rates, which is in sync with our sector view of
an emerging credit cycle. The report, however, concedes that SBI’s capital ratios
will soon be restored through the cap infusion by the government.
Capital & NPL concerns already known, largely priced-in
We believe the two key issues of capital and asset quality are well known and are
not 'new'. Moreover, we believe that these issues are largely priced-in. Also, this
downgrade will not materially impact SBI’s earnings, as 85% of its funding is from
domestic sources. Moreover, we believe this downgrade may actually push SBI
and the govt to provide more clarity on the timeline for capital raising and expedite
the process.
Risk-return stacked in its favor
While SBI is guiding for slippages to remain at elevated levels in 2QFY12, we
believe that, at current valuations of 1.2x FY 13 Book (adj. for Subs), the stock is
pricing-in most of the negatives. We are building in (our base case) incremental
delinquency of +3.2% and weaker loan growth (~14-15%) in FY13. Moreover,
under our Stress scenario, we est. delinquency of +3.4% and loan growth of
~13%, despite which we expect SBI’s earning to grow by +30/27% (FY12/13) and
Tier I at +7.2% in FY12 (+6.8% in FY13). We believe that risk/return is strongly
stacked in its favor.
Price objective basis & risk
SBI (SBINF / SBKFF)
Our 12-month price objective on SBI is Rs2700 (US$120/GDR). Our PO is based
on the average historical PB multiple. Risk-return remains positive, with RoEs
(banking biz.) at +20-21% in FY13 (vs +15% in FY11) and the stock trading at
1.2x FY13 BV. Moreover, SBI still is likely to deliver earnings growth of +45/25%
for FY12/13, led by thet top line. Non-bank biz. adds another Rs265/share
(FY13E). Assuming a capital raise in FY12 (US$1.5bn), RoE still is likely at 18%,
with the stock to trade at +1.1x FY13 book. Our PO is benchmarked to the
Gordon model theory, where we assume RoE of 20pct and CoE of 14%, and
assign a +25% premium to theoretical multiples owing to its large liability
franchise and dominant position in the market (+23pct market share at group
level). On a PE basis, the stock is trading at 6.4x FY13E if we adjust the share
price for the subsidiary value. Risks are a sharp rise in NPLs and a hike in
interest rates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
„Moody’s downgrades SBI rating on low tier I & Asset Quality
Today, Moody’s Investors Service downgraded SBI’s financial strength rating
(BFSR), or stand-alone rating, to D+ from C- on lower tier I and asset quality
worries. However, the senior foreign currency bond rating remains at Baa2. The
report cites SBI’s lower tier 1 (at 7.6% as of June ’11) as hindering loan growth
and providing insufficient comfort in the case of potential higher credit costs as
reasons for downgrading. Per Moody’s, non-performing assets are likely to rise in
the near term due to higher interest rates, which is in sync with our sector view of
an emerging credit cycle. The report, however, concedes that SBI’s capital ratios
will soon be restored through the cap infusion by the government.
Capital & NPL concerns already known, largely priced-in
We believe the two key issues of capital and asset quality are well known and are
not 'new'. Moreover, we believe that these issues are largely priced-in. Also, this
downgrade will not materially impact SBI’s earnings, as 85% of its funding is from
domestic sources. Moreover, we believe this downgrade may actually push SBI
and the govt to provide more clarity on the timeline for capital raising and expedite
the process.
Risk-return stacked in its favor
While SBI is guiding for slippages to remain at elevated levels in 2QFY12, we
believe that, at current valuations of 1.2x FY 13 Book (adj. for Subs), the stock is
pricing-in most of the negatives. We are building in (our base case) incremental
delinquency of +3.2% and weaker loan growth (~14-15%) in FY13. Moreover,
under our Stress scenario, we est. delinquency of +3.4% and loan growth of
~13%, despite which we expect SBI’s earning to grow by +30/27% (FY12/13) and
Tier I at +7.2% in FY12 (+6.8% in FY13). We believe that risk/return is strongly
stacked in its favor.
Price objective basis & risk
SBI (SBINF / SBKFF)
Our 12-month price objective on SBI is Rs2700 (US$120/GDR). Our PO is based
on the average historical PB multiple. Risk-return remains positive, with RoEs
(banking biz.) at +20-21% in FY13 (vs +15% in FY11) and the stock trading at
1.2x FY13 BV. Moreover, SBI still is likely to deliver earnings growth of +45/25%
for FY12/13, led by thet top line. Non-bank biz. adds another Rs265/share
(FY13E). Assuming a capital raise in FY12 (US$1.5bn), RoE still is likely at 18%,
with the stock to trade at +1.1x FY13 book. Our PO is benchmarked to the
Gordon model theory, where we assume RoE of 20pct and CoE of 14%, and
assign a +25% premium to theoretical multiples owing to its large liability
franchise and dominant position in the market (+23pct market share at group
level). On a PE basis, the stock is trading at 6.4x FY13E if we adjust the share
price for the subsidiary value. Risks are a sharp rise in NPLs and a hike in
interest rates.
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