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State Bank of India (SBIN) - Co. Update - Dated - Sept. 24, 2013




Axis Capital Limited


24 Sep 2013





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State Bank of India (SBI) trades at 1x FY15E ABV versus average 0.6x FY15E ABV for next-in-line PSU banks like PNB, BoB and BOI. Our key arguments why SBI’s valuation premium is unsustainable:  Change in guard/ management change: SBI will witness an overhaul in top management with the Chairman retiring in current month (Sep 2013) and three out of four managing directors (MD’s) retiring over next seven months (by April 2014) - The change in guard implies uncertainty over existing strategies as the new management would take charge in a challenging environment. Historically, the stock has usually underperformed Bankex after a change in guard in medium term  Aggressive FY14 credit growth target (~20%; well over RBI projection of 15% for the banking sector) may pose challenges going forward  Aggressive pricing on assets and liabilities will continue to put pressure on NIM (declining for last 7 quarters)  Asset quality to remain under stress as macro environment continues to face headwinds. Business growth is mainly from mid-corporate and SME segment (together largest contributor to NPAs). Increase in lending rates may further accentuate asset quality issues (GNPA has doubled in last 7 quarters)  SBI plans to raise ~Rs 100 bn (9% equity dilution) in near term, which will keep RoE under pressure. Note our estimates do not factor in any dilution  Merger of one associate bank (cost of ~Rs 20 bn) in near future to impact financials and management bandwidth Outlook We believe growth above industry average will bring in challenges both in terms of margin and asset quality. In absence of capex demand, SBI will have to rely more on retail/ working capital loans which are competitively priced along with higher operating costs. We maintain 14% YoY business growth estimate for SBI in FY14, in line with RBI’s projection for the industry. Restructured loans and slippages will further dampen profitability as provisioning expenses increase. Also, merging an associate bank at a time when capital is scarce will put pressure on return ratios and management bandwidth. Hence we reduce our target multiple from 1x to 0.9x FY15E ABV. Downgrade to SELL with revised SOTP-based TP of Rs 1,492 [0.9x FY15E ABV of Rs 1,357 (adj. for value and cost of invt) + Rs 377 value of invt] vs. Rs 1,762 earlier. Our TP implies downside of 10% from CMP of 1,652. The stock trades at 1.1x FY14E ABV of Rs 1,112 and 1.0x FY15E ABV of Rs 1,238. ABV is computed ex value and cost of investments. Regards, Praveen Agarwal (Executive Director – BFSI) Institutional Equity Research Axis Capital Ltd Tel.: + 91 22 4325 1102 Namesh Chhangani (AVP – BFSI) Institutional Equity Research Axis Capital Ltd Tel.: +91 22 4325 1127 Deepak Agrawal (VP – BFSI) Institutional Equity Research Axis Capital Ltd Tel.: + 91 22 4325 1133

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