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State Bank of India (SBI.BO)
Improving Operationally, Macro Leverage
Reduce Target Price to Rs2,500, Maintain Buy — We reduce our EVA-based
target price on SBI to Rs2,500, benchmarked to a sum-of-the-parts valuation
methodology (with Rs2,447 as fair value). Our sum of parts values its core
banking business at 1.4x consolidation P/BV, life insurance business at Rs98 per
share, asset management business at Rs20 and capital markets subsidiary at
Rs75. Maintain Buy.
Reduced Earnings by 8-11% over FY12/13E — We also reduce our earnings
by 8-11% over FY12-13E to factor in higher credit costs and slightly lower asset
growth.
Improving Returns and Gradual Stabilization — SBI’s underlying business
parameters remain healthy: a) Its funding franchise continues to remain
steadfast; b) Margin uptick has been strong; and c) Loan growth remains firm.
We believe SBI’s new management has taken steps to reverse its aggressive
accounting and pricing strategy – should structurally improve its return profile.
However, the key concerns remain on asset quality – while management remains
focused on improvements we believe given current challenging macro,
improvements will remain gradual. Overall, we believe that beyond the current
pain, potential earnings should improve, especially if the macro turns easier.
Quant View: Unattractive — SBI currently lies in the Unattractive quadrant of
our quant team’s Value-Momentum map with weak momentum and weak value
scores.
SBI currently lies in the Unattractive quadrant of our Value-Momentum map with
weak momentum and weak value scores. The stock has moved from the Contrarian
quadrant to the Unattractive quadrant in the past 3 months indicating a weakening
in the valuation scores. Compared to its peers in the Banks sector, SBI fares worse
on the valuation metric and on the momentum metric. On the other hand, compared
to its peers in its home market of India, SBI fares better on the valuation metric but
worse on the momentum metric.
From a macro perspective, SBI has a high beta to the region so is likely to rise (or
fall) faster than the region. It is also likely to benefit from falling Commodity (ex-oil)
prices, and a weaker US Dollar.
State Bank of India
Company description
SBI is India's largest bank with around 18% market share in deposits and loans,
over 13,500 branches and more than 130m customers. Together with its five
associate banks (ownership ranging from 75% to 100%), the SBI group has a 25%
market share in deposits and loans, and has over 16,000 branches. SBI has the
largest overseas presence among Indian banks, with 54 offices in 28 countries. The
Government of India owns 59.73% of the bank. SBI is a banker to most state
governments, and has a dominant share of government fee business. SBI has a
presence in other financial services through subsidiaries and joint ventures. It has a
joint venture with Cardiff for life insurance and also has a presence in asset
management, investment banking and primary dealership. The SBI group has more
than 25,000 ATMs, the largest spread in the country, and is aggressively expanding
its technology-based offering across its existing network.
Investment strategy
We rate SBI Buy/Low Risk. SBI has faced significant pain recently in terms of
operational, accounting and execution slippages. However, we believe its strong
deposit franchise, strong market positioning, well diversified asset book and large
distribution network are key strengths, which position it well in a rising interest rate
and tight liquidity environment. While there are challenges on execution, the new
management does seem to be focused on making operational improvements. We
believe the SBI will see near-term improvements in key operating parameters,
namely net interest margins, operating costs and asset quality slippages. Also, a
likely healthy economic and growth environment will also improve its own growth
and return profile going ahead. We see value in the stock at current levels.
Valuation
Our target price of Rs2,500 is based on our EVA model, in which we assume a riskfree
rate of 8.0%, in line with the market level. Our longer-term loan loss assumption
is 100bps pa (in line with the industry). Our target price for SBI includes a subsidiary
valuation of Rs540: Life Insurance at Rs98 per share, associate banks at 1.0x 1Yr
Fwd PBV (Rs346), value for SBI's Asset management business (Rs20, 4% of
assets) and incorporates capital markets subsidiary at Rs75 based on 10x 1Yr Fwd
PE. We also use a sum of parts valuation which values SBI at Rs2,447 per share. In
this valuation, we benchmark the consolidated banking business off a 1.4x 1Yr Fwd
P/BV – slight premium to our benchmark valuation for its peers. We also add Rs194
per share for its non-banking subsidiary businesses as detailed earlier. We base our
target price on EVA, as we believe it better adjusts for the relatively dynamic cost of
capital and better captures the long-term value of the business.
Risks
We rate SBI as Low Risk, in line with CIRA's quantitative-based risk rating system.
We believe this is appropriate given the nature of SBI's business, the quality of
management, and the direct government ownership. The downside risks that could
impede the stock from reaching our target price include: (1) A sharp rise in interest
rates; (2) Asset quality concerns given strong loan growth and high interest rates; (3)
Lack of liquidity or deposit growth; (4) Government involvement could be contrary to
the interests of minority shareholders; and (5) A lack of capital to support growth
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
State Bank of India (SBI.BO)
Improving Operationally, Macro Leverage
Reduce Target Price to Rs2,500, Maintain Buy — We reduce our EVA-based
target price on SBI to Rs2,500, benchmarked to a sum-of-the-parts valuation
methodology (with Rs2,447 as fair value). Our sum of parts values its core
banking business at 1.4x consolidation P/BV, life insurance business at Rs98 per
share, asset management business at Rs20 and capital markets subsidiary at
Rs75. Maintain Buy.
Reduced Earnings by 8-11% over FY12/13E — We also reduce our earnings
by 8-11% over FY12-13E to factor in higher credit costs and slightly lower asset
growth.
Improving Returns and Gradual Stabilization — SBI’s underlying business
parameters remain healthy: a) Its funding franchise continues to remain
steadfast; b) Margin uptick has been strong; and c) Loan growth remains firm.
We believe SBI’s new management has taken steps to reverse its aggressive
accounting and pricing strategy – should structurally improve its return profile.
However, the key concerns remain on asset quality – while management remains
focused on improvements we believe given current challenging macro,
improvements will remain gradual. Overall, we believe that beyond the current
pain, potential earnings should improve, especially if the macro turns easier.
Quant View: Unattractive — SBI currently lies in the Unattractive quadrant of
our quant team’s Value-Momentum map with weak momentum and weak value
scores.
SBI currently lies in the Unattractive quadrant of our Value-Momentum map with
weak momentum and weak value scores. The stock has moved from the Contrarian
quadrant to the Unattractive quadrant in the past 3 months indicating a weakening
in the valuation scores. Compared to its peers in the Banks sector, SBI fares worse
on the valuation metric and on the momentum metric. On the other hand, compared
to its peers in its home market of India, SBI fares better on the valuation metric but
worse on the momentum metric.
From a macro perspective, SBI has a high beta to the region so is likely to rise (or
fall) faster than the region. It is also likely to benefit from falling Commodity (ex-oil)
prices, and a weaker US Dollar.
State Bank of India
Company description
SBI is India's largest bank with around 18% market share in deposits and loans,
over 13,500 branches and more than 130m customers. Together with its five
associate banks (ownership ranging from 75% to 100%), the SBI group has a 25%
market share in deposits and loans, and has over 16,000 branches. SBI has the
largest overseas presence among Indian banks, with 54 offices in 28 countries. The
Government of India owns 59.73% of the bank. SBI is a banker to most state
governments, and has a dominant share of government fee business. SBI has a
presence in other financial services through subsidiaries and joint ventures. It has a
joint venture with Cardiff for life insurance and also has a presence in asset
management, investment banking and primary dealership. The SBI group has more
than 25,000 ATMs, the largest spread in the country, and is aggressively expanding
its technology-based offering across its existing network.
Investment strategy
We rate SBI Buy/Low Risk. SBI has faced significant pain recently in terms of
operational, accounting and execution slippages. However, we believe its strong
deposit franchise, strong market positioning, well diversified asset book and large
distribution network are key strengths, which position it well in a rising interest rate
and tight liquidity environment. While there are challenges on execution, the new
management does seem to be focused on making operational improvements. We
believe the SBI will see near-term improvements in key operating parameters,
namely net interest margins, operating costs and asset quality slippages. Also, a
likely healthy economic and growth environment will also improve its own growth
and return profile going ahead. We see value in the stock at current levels.
Valuation
Our target price of Rs2,500 is based on our EVA model, in which we assume a riskfree
rate of 8.0%, in line with the market level. Our longer-term loan loss assumption
is 100bps pa (in line with the industry). Our target price for SBI includes a subsidiary
valuation of Rs540: Life Insurance at Rs98 per share, associate banks at 1.0x 1Yr
Fwd PBV (Rs346), value for SBI's Asset management business (Rs20, 4% of
assets) and incorporates capital markets subsidiary at Rs75 based on 10x 1Yr Fwd
PE. We also use a sum of parts valuation which values SBI at Rs2,447 per share. In
this valuation, we benchmark the consolidated banking business off a 1.4x 1Yr Fwd
P/BV – slight premium to our benchmark valuation for its peers. We also add Rs194
per share for its non-banking subsidiary businesses as detailed earlier. We base our
target price on EVA, as we believe it better adjusts for the relatively dynamic cost of
capital and better captures the long-term value of the business.
Risks
We rate SBI as Low Risk, in line with CIRA's quantitative-based risk rating system.
We believe this is appropriate given the nature of SBI's business, the quality of
management, and the direct government ownership. The downside risks that could
impede the stock from reaching our target price include: (1) A sharp rise in interest
rates; (2) Asset quality concerns given strong loan growth and high interest rates; (3)
Lack of liquidity or deposit growth; (4) Government involvement could be contrary to
the interests of minority shareholders; and (5) A lack of capital to support growth
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