Buy SBI - Kotak

Q4FY12: Encouraging performance; worst of asset quality is likely behind us.

- NII was strong (45.2% YoY), mainly driven by margin expansion (82bps YoY) despite moderate loan growth (14.7% YoY). Its net profit was even stronger at Rs.40.5 bn (194x YoY on low base), aided by lower credit costs (decline of 57bps YoY) and marginal rise in opex (8.5% YoY) along with robust core performance.

- Although credit growth (14.7% YoY) came a tad lower than the system, funding franchise remained strong (46.64% CASA, lower dependence on wholesale funding). New management has been focusing more on margins as against earlier strategy of garnering market share, even if it came at some margin sacrifice. We are modeling NIM at 3.66% during FY13E as against 3.85% achieved during FY12.

- Lower slippages (2.27% on annualized basis) along with relatively lesser addition to restructured portfolio (Rs.51 bn) during Q4FY12 were very encouraging. In absolute terms, both gross NPA and net NPA declined QoQ by 1.1% and 15.9%, respectively; PCR also improved by 558bps QoQ to 68.1% at the end of FY12, leading to improvement in B/S quality.

- We have raised the earnings by ~5% for FY13 and now expect it to grow 17.7% during FY13E. We expect return profile to get better by FY13E (RoA: ~0.9%, RoE: ~16%) and hence we maintain BUY rating on the stock with revised TP of Rs.2484 (earlier Rs.2436) based on SOTP methodology where core business is valued at Rs.1731 (1.5x FY13E ABV) and subsidiaries are valued at Rs.753 (after giving 20% holding company discount).

Source : Equity Bulls

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