Sell State Bank of India (SBI) Return Potential: (12%) Downgrade to Sell on aggressive strategy and higher stress loans :: Goldman Sachs

Source of opportunity
We downgrade SBI to Sell from Neutral as we expect stress levels to
remain elevated and find the company’s desire to grow loan book
aggressively under current adverse macro environment concerning.
Lending in 4QFY13 to mid-corporate and SME sector was >50% of
incremental loans when outstanding stress loans there are high at 15.6%
and 10.5%. Although SBI trades near average valuation: FY14E PABV of
1.6x, RoA is below average and stress levels significantly higher at 8%. We
lower FY14/FY15 PAT 14%/5% and cut our SOTP-based 12-m TP to Rs1900
(from Rs2420) and believe SBI will continue to underperform our coverage.
Catalyst
We believe FY14 will be a tough year for SBI as: (1) it will likely continue to
face margin pressure given aggressive lending strategy. We expect NIM to
decline 27bps in FY14 to 2.9%. NII growth (yoy) will thus be muted at 7.5%.
(2) We expect FY14 stress loan formation to remain elevated though lower
than FY13 at 4% (FY13: 6.6%), with risk of further deterioration if macro
remains weak. (3) We expect operating expenses to increase 16% yoy and
note this number could rise higher as the bank will need to make
provisions for pensions, estimates for which are not available. (4) We
expect slower revenue and higher expenses to pull down already low RoA
to 0.7% for FY14 vs 1% in FY13.
Valuation
SBI trades at FY14E PABV of 1.6X (1.4x standalone) vs RoA of 0.74%
(average FY14E-FY15E) and PAT growth of 4% (FY13-15E CAGR). Its
valuations are also higher than those of other PSU banks like BOB and
PNB that trade at FY14E PABV 0.8X and generate RoA of 0.8% to 1%.
Key risks
Improvement in macro, lower NPL accretion, higher margin.

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