State Bank of India —Buy:: Business Line,

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Investors with a two/three-year investment horizon can consider taking fresh exposure to the stock of State Bank of India.

The stock has lost 45 per cent of its value from its peak in November and is trading at an attractive valuation. At the current price of Rs 1,955, the stock discounts its estimated FY12 consolidated book value by 1.4 times. While other PSU banks' profitability will take a hit for the next four years on the back of employee pension provisioning, SBI has accounted for these costs upfront. SBI's stock is trading at 18 per cent discount to its five-year average price-to-book value.

Strong branch network (13,577 branches as of June), superior low-cost deposit proportion, diversified loan book, and a sharp improvement in Net Interest Margins (NIM) are key positives.

As uncertainty over rights issue clears, it will provide further upside to the stock.

The recent pick-up in credit-offtake augurs well for SBI as the market leader in advances.

The SBI base rate continues to be amongst the lowest in the banking system which would help it meet credit growth targets.

While the base rate is low, this necessarily does not mean the bank has to take a hit on the margins, as the bank continues to have very low cost of funds.

As of June 2011, the low-cost deposits ratio stood at 48 per cent.

NIM improved by 55 basis points sequentially to 3.62 per cent in June quarter, thanks to the base rate hike. Since June 2011 quarter, SBI has hiked base rates by another 75 bps which could further help margins.

The only risk that remains is that of asset quality slippages due to moderation in GDP growth and restructured assets (4.5 per cent of the book).

However, after the creation of counter cyclical buffer, the provisions are lower for incremental NPAs.

The provision coverage ratio as of June 2011 was 67.25 per cent against the required 70 per cent.

Improved operational performance coupled with lower provisioning beyond September 2011 would improve the profitability of SBI.

Moderation in 10-year and five-year gilt yields would limit the provision for investment depreciation.