Sell State Bank of India - TP Rs.1900 - Emkay

Sell, Target Price Rs 1,900 Not yet out of woods

Provision cost to remain higher at 120bps average despite easing slippages: Significant additions to SS and D1 category will ensure that provision costs continues to remain high at average 120bps even as the slippages may come off to 2.2-2.4% compared to 2.5-3% over past two years.

High NNPL / networth ratio will warrant capital infusion on regular intervals: Though Q4FY12 reported tier I CAR may look higher at 9.8%+, we remain skeptical about sustainability of the same looking at high net NPL/net worth ratio at 19%. The ratio will continue to remain high despite capital infusion by the government of India.

Standalone RoA to be capped at 1.2% over FY13-14E: Steep provisioning requirements at 120bps (NPA migration + higher slippages) will restrict RoA performance. We do not expect standalone RoAs to go above 1.2% over FY13-14E.

Valuations: Valuations at 1.5x consolidated banking ABV operations are unreasonable looking at the risk of continuance requirement of equity dilution in light of high provision costs and higher net NPL/net worth ratio.

Near term catalyst and earnings performance: We expect bank to report 16% CAGR in customer assets over FY12-14E. The stock has outperformed its peers in recent past on basis of its stellar show on NPA front and recoveries. We however remain wary over slippages / recovery in FY13.

Source : Equity Bulls

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