SBI - Asset Quality To Remain Under Strain - Nirmal Bang

We expect State Bank of India (SBI) to report 1QFY13 profit growth of 110% YoY, but a 17.8% fall QoQ, at Rs33,300mn, 7% lower than Bloomberg consensus estimate of Rs35,819mn. We expect asset quality and restructured asset pipeline overhang to continue, with net interest income (NII) likely to grow 19% YoY and provisioning to decline 7.6% YoY. We reiterate our view of asset quality concerns resurfacing after a muted performance in the previous quarter, with a weak macro-economic environment and higher delinquencies tapering down growth going ahead. We reiterate our Sell rating on the stock with a target price of Rs1,786, down 11% from the current market price.

Operational performance: We expect SBI to report NII growth of 18.8% YoY but decline 0.6% QoQ, at Rs115,226mn, aided by interest income growth of 18.3% YoY and 0.2% QoQ. We expect interest expenses to post 18% YoY and 0.7% QoQ growth. We expect non-interest income to grow 12.5% YoY, but show a sequential decline of 26%. We expect SBI to report pre-provisioning profit (PPP) of Rs85,600mn, a growth of 18.2% YoY but 10.8% decline QoQ. It is likely to report net profit growth of 110.3% YoY owing to lower base in 1QFY12, at Rs33,300mn. However, provisioning is likely to fall 7.6% YoY and 5.7% QoQ. Earning per share is expected at Rs49.6 against Rs24.9 in 1QFY12 and Rs60.4 in 4QFY12.

Asset quality concerns to remain: We expect higher interest rates coupled with sluggish demand outlook for the economy to weigh on corporate performance, resulting in higher loan delinquency and restructuring. We expect restructured standard loans to grow 8% QoQ, but decline 3.6% YoY, to Rs336,500mn. We expect SBI to report a decline in provisioning by 5.7% QoQ and post gross non-performing asset (GNPA) and net non-performing asset (NNPA) growth of 4.6% and 10% QoQ, at Rs415,000mn and Rs174,000mn, respectively.

Valuation and outlook: We feel economic growth headwinds globally along with decelerating domestic demand will put additional strain on asset quality of banks and remain an overhang for the banking sector. At the current market price, SBI trades at 1.4x FY13E BV, We retain our Sell rating on the stock with a target price of Rs1,786.

Source : Equity Bulls

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