Buy stocks of SBI; target of Rs 2407

“SBI delivered strong bottom line of Rs 4,050 crore growing 24.1% Q-o-Q above our and street expectation, driven by robust NII growth, sharp pick up in non interest income and improved asset quality. NII grew strongly 45.2% y-o-y and 2.1% q-o-q driven by healthy NIM and steady loan growth 15.8% y-o-y. Core fee income witnessed strong sequential jump (59.6% Qo- Q) mainly due to year end transaction fees and strong growth in government business. Trading loss came down sharply from Rs1,090 crore in Q3FY12 to Rs26 crore due to relatively better market conditions. Cost to income ratio declined 314bps Q-o-Q to 43.4% reflecting improving operating efficiency. Despite sharp improvement in asset quality, the bank saw marginal reduction in loan loss provision, aiming to improve overall coverage ratio. Advances and deposits growth were 15.8% y-o-y and 11.7% y-o-y respectively mirroring industry trend. CASA ratio remained at healthy levels 43.9%.”

“Asset quality saw marked improvement; slippage ratio came down from 4.2% in Q3FY12 to 2.1% in Q4FY12. However the bank has restructured loans amounting to Rs5,134 Cr (0.6% of advances), one of the lowest in peers during the quarter. Gross and Net NPAs stood at 4.4% & 1.8% respectively with coverage ratio of 68.1%. Consolidated PAT grew 37.2% Rs15,343 crore in FY12. Maintain BUY.”

“Net interest income showed strong momentum growing 45.2% y-o-y and 2.1% q-o-q led by steady loan growth 15.8% y-o-y and healthy margins. Net interest margins came off 16bps Q-o-Q to 3.89% largely attributable to higher funding costs and stable asset yields. The management has guided net interest margins to sustain at ~3.75% with upward bias in FY13. We expect NII to grow 13.4% CAGR over FY12-14. Loan growth has been at healthy levels of 15.8% y-o-y & 2.8% Q-o-Q driven by SME advances, agricultural and retail. Retail loan growth has been at healthy level of 10.8% y-o-y and 4.1% q-o-q largely driven by strong growth in auto loans and housing loans. The management has indicated 16-17% loan growth and 15-16% deposit growth in FY13. The bank has maintained superior CASA ratio at 44% despite challenging macro environment and system level contraction in current account deposits. CASA Deposits increased 12.0% y-o-y and 2.8% y-o-y reflecting superior power of franchise.”

“SBI has delivered strong operating performance led by steady NII, strong non interest income and marked improvement in asset quality. Strong pick up in non interest income and better than expected asset quality are key positives from the result. We expect SBI to deliver 23.2% CAGR in earnings over FY12-FY14 driven by steady NIMs, industry line loan growth and stable provisions. Higher-than-expected slippages and credit costs due to further deterioration in macro environment are key investment risk in the stock. At Rs 1,942 the stock is trading 1.1x FY13 core book and 6.9x FY13 core earnings; We maintain our BUY rating on the stock with a target price of Rs 2407,” says KRChoksey research report.