SBI - Calibrated Growth Likely - Nirmal Bang

We had a meeting recently with the senior management of State Bank of India (SBI). We discussed a host of issues ranging from the current macro-economic environment and government policy moves at the macro level to its 1QFY15 results and the road ahead for the bank. We reiterate our Buy rating on SBI with a target price of Rs2,915, up 16% from the current market price. We have valued the standalone entity at 1.6x FY16E ABV and the subsidiaries at Rs590/share. Following are the key takeaways:

Policy framework: SBI's management believes that the government is making all the right moves and despite the recent Supreme Court (SC) ruling on coal block allocation, the current policy environment is refreshing and may witness a considerable improvement in the medium to long-term. To a query on SBI's loan exposure to the companies affected by SC's ruling in the coal block allocation case, the management maintained that firstly the bank does not have a significant exposure to such companies and secondly, the exposure is only towards five to six accounts, which are all operational. The management maintained that despite the SC ruling, the government will make efforts to see that current operational assets are not hampered. The management sounded confident as the capital market bounced back and has given a reasonable opportunity to over-leveraged corporate groups to put their assets on block. On the prospects of interest rates heading south, the management believes there may be some concrete action in this regard by FY15-end.

NPAs likely to peak out in FY15: The management gave guidance of non-performing assets (NPAs) peaking out in FY15. Major loan slippage was witnessed in small and medium enterprise (SME) and mid-corporate segments where SBI has significantly strengthened its lending standards and cut down growth in those segments. Other than the stress in a few big-ticket accounts, FY15 loan slippage is seen below FY13 level. In line with the trend in earlier years, slippage may ease in subsequent quarters compared to 1QFY15. The management expects loan recovery and up-gradations to surpass the slippage in FY16.

Agriculture sector portfolio: SBI has direct agriculture sector loan exposure of Rs1,240bn (12.2% of its domestic advances). While the management sounded positive on SBI's agriculture sector loan book, which is collateralised by gold to the extent of 33%, it remains wary of the current practice of poll commitment by political parties (like loan waiver). The management is of the view that such practices should be avoided. On such poll commitment by political parties, the management maintained that the burden falls on respective state exchequers as they resort to bond issuance. On state-wise agriculture sector loan exposure, the management maintained that Andhra Pradesh accounts for a large chunk of SBI's loan exposure, while there is a miniscule exposure to Telangana.

Outlook and valuation: We have retained our Buy rating on SBI with a target price of Rs2,915, as we feel the largest public sector bank is better placed in terms of capitalisation, unmatched CASA (current account savings account) deposit profile and strong distribution franchise compared to peers. With the macro-economic environment improving, we feel SBI is a pure proxy play on economic revival. SBI stock currently trades at 8.1x FY16E earnings, 1x FY16E book value and 1.3x FY16E adjusted book value.

Shares of STATE BANK OF INDIA was last trading in BSE at Rs.2625.6 as compared to the previous close of Rs. 2601.4. The total number of shares traded during the day was 160097 in over 15837 trades.

The stock hit an intraday high of Rs. 2632.95 and intraday low of 2588. The net turnover during the day was Rs. 417726225.

Source : Equity Bulls

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