Upgrade SBI to BUY - Incremental Slippages & Credit Cost to Move Southwards - Karvy

State Bank of India (SBI) is currently trading at 5% discount its five year average valuation, while the stock has underperformed the Bankex by 5% over last one year, mainly on account of weak asset quality. Currently, the stock trades at premium to its peers in line with historical trend.

Credit Cost to Move Southwards: SBI has witnessed huge pressure on its asset quality with its Gross NPA increasing by 180 bps over last two years. Resultantly, the Bank has accounted for higher credit cost, while keeping provision coverage stable. With expectations of gradual recovery in the economy, we expect incremental slippages and credit cost to start trending downwards.

Pressure on NIMs is Likely to Continue: SBI's NIMs (domestic) underwent a significant compression of ~70 bps over last four quarters. Pressure on its NIMs is expected to continue, going forward on account of slowdown witnessed in high-yielding SME segment and discounts offered in the retail segment.

Overall Growth to Remain Moderate: Overall slowdown in SBI's corporate credit is a cause of concern. The Bank has significantly tightened its lending standards for mid-corporate and SME segment, which has seen higher slippages. SBI's Management has hinted at marginal improvement in new project proposals. We believe that majority of incremental growth will be driven by retail and large corporate segments.

Outlook & Valuation

At the CMP, the stock - after adjusting for subsidiaries - trades at 6.9x & 5.9x FY14E & FY15E earnings, and at 1.5x & 1.2x P/ABV FY14E & FY15E, respectively. Based on 10% discount to its historical mean valuation implying 1.5x P/ABV FY15E for parent & Rs. 560 for its stake in subsidiaries, we upgrade our recommendation on State Bank of India to "BUY" from "SELL" with upwardly revised target price of Rs. 2,885 per share (from Rs. 1,980 earlier).

Source : Equity Bulls

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