SBI- Pressure from all Fronts:: Karvy

Pressure from all Fronts
We met the management of State Bank of India (SBI). The key takeaways
from the discussions are given hereunder.

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Asset quality strain to continue
Bank has seen significant asset quality pressures over last two years with
GNPA touching 5.2% in Q2FY13. Management admits ongoing strain and
does not expect any significant improvement unless there is a turnaround
seen in the real sectors of the economy. It expects slippages net of recovery of
~Rs45bn in each quarter. Quarterly run rate of incremental restructuring to
remain ~25bn, excluding exposure to suzlon of Rs8bn which may come for
restructuring. In relation to RBI’s annual financial inspection, major
difference of opinion pertains to amount of provision to be made as against
incremental slippages to be recognized. They will have to provide additional
Rs3bn in Q3FY13 pertaining to increase in standard asset provisioning on
restructured asset to 2.75% by RBI.
Credit growth remains sluggish
Overall slowdown in corporate credit is a cause of worry. They have also
significantly tightened lending standards for mid‐corporate and SME
segment which has seen higher slippages, as a result management does not
expect growth of more than 6‐7% in such segments. New project proposals
although have started marginally, but it isn’t enough to change the
disbursement trend in corporate loans. Majority of incremental growth will
be driven by retail and large corporate segments.
Margin to be under pressure
Domestic NIMs have seen a significant compression of ~70bps over last 4
quarters. Pressure on NIMs is expected to continue on account of slowdown
seen in high yielding SME segment and rebates given in retail segment.
International NIMs is volatile mainly on account of volatility in currency.
Excess liquidity of Rs700bn last quarter has slightly come off, but not
significant enough to have any positive impact on NIMs.
View & Valuation
Bank needs additional capital of Rs1000bn over next 5 years, assuming 20%
growth in RWA to comply with Basel III norms which can be a challenge. It
will start providing for wage hike under 10th biparate settlement from
Q4FY13 onwards. At the CMP, the stock trades at 9.3x and 8.1x earnings, and
at 2.2x and 1.8x P/ABV FY13E and FY14E respectively. Stripping out value
for subsidiaries, it is trading at 6.1x P/E FY14E and 1.3 P/ABV FY14E. We
continue our rating of SELL with a price target of Rs1,980 per share. We
value it on SOTP basis on P/ABV of 1.1x FY14E for the parent and Rs560 for
subsidiaries.