Asset quality improvement likely; upgrade to BUY- SBI ::: Religare research

Asset quality improvement likely; upgrade to BUY
We upgrade SBIN to BUY with a TP of Rs 2,540. While the bank reported a weak 2Q, we see asset quality pressures abating at the margin. NIMs could see only limited compression and may pick up with loan growth revival. We also believe SBIN would be the biggest beneficiary in a falling interest rate scenario due to its high mid-corporate/SME exposure. While a likely capital infusion could be a near-term overhang, it would be a long-term positive given the rising capital requirements under Basel III.

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 Asset quality pressures abating gradually: While we do not expect a sharp decline in SBIN’s slippages, we believe stress is at near-peak levels, especially in the mid-corporate segment (20%+ of the book stressed). Also, SBIN’s restructuring has been lower than other PSBs and largely restricted to CDRs. PCR at 63% remains a concern but should improve as core profitability sustains and asset quality improves.
 NIMs have likely bottomed out: While SBIN’s LDRs appeared stretched in FY12 at 78.5%, they have corrected by 190bps to 76.6% in H1FY13 – the bank now carries excess balance sheet liquidity of Rs 70bn. We expect LDRs to rise from hereon as loan growth picks up (likely in Q4FY13). This, coupled with re-pricing of residual bulk deposits, would aid NIMs. We note that SBIN’s CASA remains solid even in a tough resource mobilisation environment – a reflection of its strong franchise (as against a sharp deterioration for other PSBs).
 Pressures persist but likely priced in: SBIN has of late been efficient in capital utilisation with an estimated 50bps‒60bps of tier-I getting released in FY13 (Fig 7). While capital issuance is a near-term overhang, we consider it is as a long-term positive given the higher capital requirements under Basel III. Asset quality volatility could continue in the near term, but is likely priced in (current valuations at a 20% discount to the 5-yr average). The stock trades at a premium to other PSBs, which should sustain given SBIN’s strong liability franchise and pricing power.