SBI - Upgrading to Buy - Centrum

SBI's Q3FY13 core operating performance was in line though bottomline disappointed on higher provisioning. Asset quality challenges persisted in Q3 with GNPA up 9% QoQ, slippage rate high at 3.5% and incremental restructuring at 1.2%. Without committing, the management commentary was mildly positive led by expectations of better recoveries in Q4, upgrades from NPA to restructured and lower possibility of incremental pain. Given the recent correction in the stock, we upgrade our recommendation to Buy from Neutral with price target of Rs2,550.

Asset quality pain persists, hopeful for Q4: Asset quality matrices continued to worsen further with: 1) slippages at Rs82bn indicating 3.5% annualised slippage rate 2) GNPA going up 9% QoQ to 5.3% - highest in industry 3) PCR eroding by ~125bps to 61.5%. On a positive note, 1) SBI has restructured some of the incremental slippages already (in Jan'13) and hence should be upgraded in Q4FY13 and 2) Rs15bn worth of restructured advances have been upgraded based on recent RBI directive bringing down the pool to 3.4% of loans (borrower wise classification now). The management commentary implied that with a large part of the pain recognised already, slippages will be contained though restructuring could remain high given the pipeline.

NIM stable QoQ: NII de-grew by 3% YoY to Rs112bn though largely in line with our estimate of Rs113bn. Sequentially, NIM was largely stable at 3.3% though domestic NIMs witnessed marginal contraction. Yield on advances declined 12 bps QoQ on high NPAs and shift in loan mix while cost of deposits remained relatively flat. The management was quite upbeat on NIM trajectory going forward though we remain conservative.

Loan growth at 18%: Loan book grew in line with industry at 16% YoY with large corporate segment (26% YoY) and international loans (28% YoY) in the lead. Meanwhile, mid-corporate and SME segments at 11% and 7% YoY respectively grew at a slower pace likely led by cautious view due to stress. Importantly, the recent management initiatives on retail segment have begun yielding results with loan growth picking up to 14% in Q3FY13 from 12.8% in Q1 and 13.6% in Q2FY13. Besides that, the capital adequacy position remains comfortable and the government is committed to infusion which will allay concerns over bank's ability to grow the loan book in the event of loan demand picking up.

Upgrade to Buy, Top Pick: We have tweaked our earnings estimates to factor in additional information. While Q3FY13 performance reflects continued asset quality pain, we believe that a large part of the asset stress has been realised in the GNPA position currently. With a relatively low restructured book (3.5% of loans) the risk of significant incremental stress seems low relative to peers. More importantly, any uptick in economic activity will help resolve the stress already realised. At the current market price, the stock trades at 1.6x FY14E ABV, 8.2x FY14E EPS. In the light of the correction in run up to the Q3 results, the current market price indicates an upside of 15% to our revised fair value estimate of Rs2550. In line, we upgrade our recommendation on the stock to Buy from Neutral earlier and suggest investors exploit the near term weakness post Q3FY13 earnings release. We include SBI in our Top Picks list.

Source : Equity Bulls

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