Buy stocks of SBI; target of Rs 2725

“State Bank of India (SBI), over the last two years, SBIN has reported significantly higher net slippages as compared to peers, leading to the perception of higher asset quality issues. While reported net slippages have been higher, restructured loans as a percentage of overall loans are one of the lowest among public sector banks (PSBs).In FY12, SBIN reported flat net stress loans (NSLs), while peers reported an increase of 75-140bp excluding AI and SEBs and 170-450bp including AI and SEBs. Notably, SBIN has the lowest NSLs (%), despite moderate loan growth. Despite taking the pain upfront, SBIN has also managed to improve provision coverage ratio (PCR) on the back of strong core operating performance (for further details, please refer to our sector update dated 31 May 2012).”

“Re-pricing of high cost deposits, strong CASA traction and significant re-pricing of loan book led to sharp improvement in SBIN’s FY12 NIM, despite higher net slippages. Its peers, on the other hand, witnessed a 10-60bp decline in NIM. Fall in interest rates, moderation in loan growth, rising competition for CASA deposits and moral suasion by the Government of India (GoI) to reduce lending rates will put pressure on NIM. However, reduction in CRR (release of INR130b, ~10bp NIM push) and equity infusion (INR79b, ~5bp NIM push) will provide cushion. In FY12, SBIN’s earnings were marred by higher one-off provisions and loss on investments (20% of PBT). Adjusting for these, core PBT would have already been at ~1.8% (of average assets) as against the reported 1.4% in FY12 and 1.5% in FY11. Lower base of fee income over FY11/12, coupled with continuous traction in fees pertaining to transaction banking , letters of credit, bank guarantees (over 75% of overall fee income in FY12) will lead to fee income CAGR of 15% over FY13-14. Healthy NIM, higher fee income, control over opex, and absence of one-offs will help SBIN to post earnings CAGR of 25%+ over FY13-14, one of the highest among PSBs.”

“We retain SBIN as our top pick in the sector, on the back of (a) strong improvement in core operating performance, (b) one of the lowest net stress loans (NSLs) amongst PSBs, and (c) one of the highest earnings CAGR of 25%+ over FY12-14. The stock trades at 20%+ discount to LPA. Buy for 31% upside,” says Motilal Oswal research report