SBI - Slippages to Move Southwards; Reiterate "BUY" - Karvy

Credit Cost to Move Southwards: State Bank of India (SBI) has witnessed huge pressure on its asset quality with its Gross NPA increasing by 140 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.

Q2FY14 - A Big Relief: Slippage 3% during significantly eased to 3% in Q2FY14 compared to shocker of 5.2% in Q1FY14. More than half of slippages are from mid-corporate segment. The Bank's Management has guided slippages in H2FY14 to track Q2FY14 levels.

Pressure on NIMs - Likely to Continue: SBI's NIMs (domestic) underwent a significant compression of ~15 bps over last four quarters. Pressure on its NIMs is expected to continue, going forward on account of slowdown seen 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. Its Management has indicated at marginal improvement in new project proposals. We believe that majority of incremental growth will be driven by retail and large corporate segments, going forward.

Outlook & Valuation

We reiterate our "BUY" recommendation on SBI with unrevised target price of Rs. 2,100 per share valuing parent at 1.3x P/ABV FY15E and Rs. 560 for subsidiaries.

Source : Equity Bulls

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