SBI - Pressure from all Fronts - Karvy

We met the management of State Bank of India (SBI). The key takeaways from the discussions are given hereunder.

Asset quality strain to continue

Bank has seen significant asset quality pressures over last two years with GNPA touching 5.2% in Q2FY13. Management admits ongoing strain and does not expect any significant improvement unless there is a turnaround seen in the real sectors of the economy. It expects slippages net of recovery of ~Rs45bn in each quarter. Quarterly run rate of incremental restructuring to remain ~25bn, excluding exposure to suzlon of Rs8bn which may come for restructuring. In relation to RBI's annual financial inspection, major difference of opinion pertains to amount of provision to be made as against incremental slippages to be recognized. They will have to provide additional Rs3bn in Q3FY13 pertaining to increase in standard asset provisioning on restructured asset to 2.75% by RBI.

Credit growth remains sluggish

Overall slowdown in corporate credit is a cause of worry. They have also significantly tightened lending standards for mid-corporate and SME segment which has seen higher slippages, as a result management does not expect growth of more than 6-7% in such segments. New project proposals although have started marginally, but it isn't enough to change the disbursement trend in corporate loans. Majority of incremental growth will be driven by retail and large corporate segments.

Margin to be under pressure

Domestic NIMs have seen a significant compression of ~70bps over last 4 quarters. Pressure on NIMs is expected to continue on account of slowdown seen in high yielding SME segment and rebates given in retail segment. International NIMs is volatile mainly on account of volatility in currency. Excess liquidity of Rs700bn last quarter has slightly come off, but not significant enough to have any positive impact on NIMs.

View & Valuation

Bank needs additional capital of Rs1000bn over next 5 years, assuming 20% growth in RWA to comply with Basel III norms which can be a challenge. It will start providing for wage hike under 10th biparate settlement from Q4FY13 onwards. At the CMP, the stock trades at 9.3x and 8.1x earnings, and at 2.2x and 1.8x P/ABV FY13E and FY14E respectively. Stripping out value for subsidiaries, it is trading at 6.1x P/E FY14E and 1.3 P/ABV FY14E. We continue our rating of SELL with a price target of Rs1,980 per share. We value it on SOTP basis on P/ABV of 1.1x FY14E for the parent and Rs560 for subsidiaries.

Source : Equity Bulls

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