State Bank of India – BUY Concerns overdone:: IIFL

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State Bank of India’s (SBI) share price fell 5% on 12 November
2010 on concerns that the bank might see further increases in
loan-loss provisions (LLP) post the regulatory review of its
financial statements requiring more assets to be classified as NPA.
Also, slower output growth for manufacturing exacerbated
concerns about the weakening economic environment. We believe
LLP is unlikely to increase materially in 2HFY11 from the trends
seen in 1HFY11—re-classification of assets post regulatory review
is done and the macro outlook remains favourable. We retain BUY.


Sharp fall in price prompted by concern of likely increase in 2HY11
LLP: SBI’s share price fell 5% on a news article that suggested regulators
may require SBI to classify Rs20bn as NPA, post the review of the
financials by the RBI for FY09. In our view, it is not uncommon to see
differences arising from interpretation in asset quality between a bank
and the regulator. The difference in this instance based on a news report
appears to be large, but will be difficult to ascertain the true picture. Our
discussion with the management of SBI suggests that re-classification as
required by the regulator was done in 1HFY11 and is unlikely to have
material impact on NPA and LLP in 2HFY11.

Macro outlook remains robust: SBI’s share price fall was exacerbated
after the factory output growth index slowed YoY and QoQ. The factory
output index has exhibited a very volatile trend recently. However,
concurrent growth indicators, such as vehicle sales, continue to show
buoyancy. The recent review of growth conditions by the RBI did not show
concerns about growth slowing down in 2HFY11. Our assessment of
growth outlook remains robust.

We retain BUY: SBI’s share price has under-performed significantly post
2QFY11 results relative to the broader market and its peers. 2QFY11
results were below expectation, primarily driven by higher credit cost. We
believe this could be due to re-classification of assets post the regulatory
review of its financial statement. We believe 2HFY11’s growth outlook
would not be affected by the above. In our view, SBI remains best
leveraged to an improving outlook.