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MOSL: SBI (Buy) - Best placed for economic recovery - Enviable SA franchise - Adequate capitalization




Motilal Oswal Securities Ltd.


31 Mar 2014





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STATE BANK OF INDIA: Best placed for economic recovery; Enviable SA franchise I Adequate capitalization I Dynamic management (SBIN IN, Mkt Cap USD22.8b, CMP INR1,840, TP INR2,175, 18% Upside, BUY) Enviable liability franchise (SA ratio of ~35%), adequate capitalization (tier-I of 10% post recent equity infusion), and lowest net stress loans (6.7%) position SBIN as best placed to benefit from an upturn in the economic cycle. Core operating profitability is likely to bottom out in FY14, as initiatives by the new management would lead to higher fees and fall in overhead expenses. The new Chairperson has outlined four key focus areas - NIM, operating leverage, NPA, HR - to improve core profitability. SBIN has underperformed the Sensex and Bankex by 29% and 22%, respectively over last one year due to weak macro environment and fall in profitability. With the economy bottoming out, we expect a stock re-rating. We reiterate Buy and roll over our target price to FY16 to INR2,175 (0.9x FY16E consolidated BV + INR120 for Insurance). Net stress loans among the lowest Historically, SBIN has been conservative in terms of NPA recognition. Its net stress loans remain one of the lowest among state-owned banks (PSBs) at 6.7%. Net stress loans for PNB, BOB, BOI and CBK stand at 12.4%, 7.9%, 6.3% and 8.8%, respectively. Over FY04-09, recoveries and upgrades as a percentage of opening GNPA stood at 33%, which further improved to ~40% over FY10-13. Due to sharp moderation in economic growth, this ratio has moderated to 25% (annualized) in 9MFY14. While our estimate for the full year is ~27%, bottoming out of macro-economic issues can provide strong upside to ABV and earnings. Sensitivity of NIM and credit cost to return ratios is high. With a 10bp fall in credit cost and 10bp improvement in NIM, RoA / RoE will improve by 11bp / 180bp+, and earnings will see an upgrade of 18%. Dynamic management at the helm of affairs The new Chairperson, Ms Arundhati Bhattacharya has outlined four key focus areas (NIM, operating leverage, NPA, HR) to improve the banks core profitability. Our recent interactions suggest that the management is aggressively focusing on improving employee and branch productivity, and controlling overhead expenses, the benefits of which are likely to be realized with a lag. Ms Bhattacharyas longer tenor (three years) and willingness to moderate growth to improve return ratios is a key positive, in our view. Healthy earnings growth; adequate capitalization; reiterate Buy SBIN recently raised INR100b, which led to an improvement in its CET1 capital to ~10%, one of the highest among the large PSBs. In our view, current capitalization is sufficient to take care of 12-18 months growth requirement. One of SBINs key strengths is its ability to maintain high share of core income, led by higher NIM (due to high SA ratio) and relatively higher share of fees (as compared to peers). In FY14, we expect core PPP to bottom out, as initiatives by the new management will lead to higher fees and decline in overhead expenses. Employee expenses are on the higher side due to one-off provisioning for pension and wage hike. Higher than expected net trading gains and decline in credit cost can provide upside to our earnings estimates. We expect SBIN to achieve earnings CAGR of 18% over FY14-16, one of the highest among PSBs.

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