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Analysts differ on stock price prospects of SBI

Friday, November 12, 2010
By Manik K. Malakar

Charles Dickens in his work noted that it was the best of times; it was the worst of times. This is a sentiment that India’s largest bank SBI (State Bank of India) must be identifying with atleast for their Q2 FY11 (Second quarter FY11) period.

So, while most numbers including margins were good, slippages - a deterioration in loan quality- too were high. For the Q2 FY11 period according to an analysts presentation, from the bank’s side NII was up by 45 %. NII is an acronym for Net Interest Income or the difference between incomes generated from loans and investments and outflow in terms of interest paid.

Net profit in the Q2FY11 quarter was Rs. 2,501 crore, a 0.46 % growth. Net Interest Income at Rs. 8,115 crore was up by 44.68 %. CASA (Current and Savings Account) deposits grew by 28 %. “SBI continued to benefit from the redemption of the high cost deposits taken in FY 08 at 9 to 10.5 % which are now being re-priced at 7 to 7.5 %. Hence the cost of deposits has remained stable qoq,’ note Kashyap Jhaveri and Pradeep Agarwal of brokerage Emkay. A major occurrence for SBI was their acquisition of the State Bank of Indore in August 2010.

Commenting on the bank’s Q2 numbers analysts Abhijit Majumder and Umang Shah of Prabhudas Lilladher note that while net profit was up, it was below street estimates. They did however mention that the NII growth was positive. The NII growth was attributed to primarily an increase in Net Advances (up 19.47 % on a yoy basis to Rs. 6, 93,224 crore).

As far as Net advances go, the loan growth has been across all segments. Retail loans grew by 21 %, SME loans grew by 17 % and international loans grew by 15 % as per information culled from the Analyst’s Presentation. Loans to the agri sector shot up by 17.77 % yoy to Rs. 69470 crore. Home loans increased by 21.17 % yoy to Rs. 79275 crore and auto loans at Rs. 17,602 crore saw a 51.82 % yoy increase. “SBI’s efforts to diversify its fee based revenue have yielded results as is evident from its high growth momentum in FY10 and again in 1HFY11,” say Alpesh Mehta and Abhishek Agarwal of Motilal Oswal.

In this otherwise good performance there is one parameter that SBI will need to address. Slippages; generally defined as a deterioration in loan quality. While SBI opened Q2 FY11 with NPA (Non Performing Assets) of Rs. 20, 825 crore, fresh slippages was Rs. 4,412 crore, additions from the State Bank of Indore was Rs. 854 crore. Loan upgradation and recovery was Rs. 2087 crore of which a write off was Rs. 799 crore. Thus closing NPA according to the bank was Rs. 23, 205 crore. ‘The bulk of the corporate slippages are from mid-corporate restructured accounts belonging to industries like iron & steel, textiles, real estate and agro based,’ informed the bank.

“Though slippages are likely to continue, management foresees higher recovery and up gradation in H2 (Second Half), which is likely to have a lower impact on earnings,” sayAbhijit Majumder and Umang Shah of Prabhudas Lilladher.

Analysts are divided on the course that the company’s stock will follow, however. “Given the sharp run-up over the past few days and below estimated earnings, the stock is likely to correct in the near term. We see this as a buying opportunity and are bullish on core operating profitability,” said Mehta and Agarwal of Motilal Oswal who have a ‘buy’ note out on the stock.

Majumder and Shah of PL too are positive in the stock’s prospects. “Though asset quality may act as an overhang on the stock in the near term, we maintain our ‘Accumulate’ rating on the stock,” the said. They have a revised one-year SOTP (Sum of the parts) value of Rs. 3,484.

A contrary view is taken by Emkay who have a ‘Reduce’ note out on the stock with a target price of Rs. 3,000. The stock is currently quoted at Rs 3167.


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