Brokers divided on SBI’s results, not everybody negative  

November 10, 2010

Opinions seem divided — while some believe the dip is a buying opportunity, others remain firmly negative

CLSA said, "SBI's healthy operating profit growth once again failed to feed through to net profit level as loan loss provisions continued to rise because of which net profit has been around Rs25 billion for the past nine quarters. SBI continues to leverage its size and technology platform to build its deposit franchise, grow fee revenues, but asset quality remains a drag and, in our view, will remain so for the next few quarters. At 15%, RoEs are lower than peers while valuations are at premium."

Kotak's view is more optimistic: "Slippages continued to remain high (at Rs44 billion, 2.7%) and were somewhat disappointing resulting in higher provisions and lower profits. We expect the stock price to correct in the near term, as result expectations were running high coupled with a very strong price performance in recent times. Retain positive view. Stock trades at 2x FY2012E PBR for core banking business. BUY with a TP of Rs 3,500."

Motilal seconds Kotak's optimism: "Adjusted for life insurance valuation, SBI trades at 1.9x FY12E Consol BV of Rs1,656 and 11.1x FY12E Consol EPS of Rs282. Standalone RoE will be 18.5% in FY12E. Given the sharp run-up up over the past few days and below-estimated earnings, the stock is likely to correct in the very near term. We see this as a buying opportunity and are bullish on core operating profitability. Maintain Buy."

Edelweiss downgraded the stock saying, "Asset quality woes continue, showing up in higher-than-expected slippages and management's guidance for higher-than-average slippages over the next few quarters. After adjusting for subsidiaries' valuation of INR 229, the stock is currently trading at 1.9x FY12E adjusted (cons.) book, leaving limited upside. Hence, we are downgrading our recommendation and rating on the stock from 'BUY' to 'HOLD'."

The main problem with SBI's results is the lack of profit growth. As CLSA puts it, "Net profit has remained around Rs25 billion for nine quarters, primarily due to sharp rise in provisions (Rs26 billion now v/s Rs6 billion in 2QFY09). Every quarter has some 'one-offs' (pension provisions, treasury gain/loss, interest on income-tax refunds etc) but the end result is same - flat net profit." This has led to a sharp contraction in RoE which is now at 15% versus around 18% for peers.

Other perceived negatives include annualised delinquency ratio at +3%, amongst the highest in the sector, the SBI chairman's statement that slippages will remain high in coming quarters, and the possibility that loan-loss provisions will remain high for a few more quarters. SBI also has a longer duration of bonds in the available for sale book (2.8 years), making it vulnerable to rising bond yields.

Key positives are CASA growth at 28%, fee income growth, and rising NIMs. Focus on shedding bulk deposits and excess liquidity in the balance sheet is also viewed as a long-term positive.

SBI shares have fallen after it declared its Q2 results seen by most market observers as disappointing.



The stock hit an all-time high of Rs3,515 on 8 November 2010.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife). — Munira Dongre