STATE BANK OF INDIA
PRICE: RS.2300 RECOMMENDATION: BUY
TARGET PRICE: RS.2550 FY11E PE: 13.3; P/ABV: 2.2X
State Bank of India (SBI) with assets worth ~$210 bn and 16-17% market
share in banking business is the largest commercial bank in India. Its high
quality liability franchise visible in terms of CASA mix (40.96% at the end of
Q2FY10, one of the highest in the industry) has helped over the years to
have one of the lowest cost of deposits.
Its inherent strength lies in brand value, unparallel geographical presence
and strong customer franchise. SBI, being the largest banking
conglomerate, would be the biggest beneficiary of improvement in the
credit cycle, in our view.
In past two years, it has aggressively leveraged its vast network to increase
its market share in banking business (loans and deposits). The excess
liquidity in the B/S led by strong growth in the deposits vis-à-vis loan
growth has kept NIM under pressure. However, margin is likely to
recuperate led by retiring of high cost bulk deposits, improving funding
mix and pick-up in loan growth. We are expecting margins to improve to
2.58% and 2.68%, respectively for FY10E and FY11E as against the present
NIM at 2.43% for H1FY10. However, on a YoY basis, NIM is likely to come
down by 35 bps in FY10.
SBI along with its non-banking affiliates and subsidiaries are true proxy to
Indian economy. The six banking subsidiaries are in good shape and the
merger, if any, would add value to the SBI group.
We initiate our coverage on SBI with a 'BUY' rating and target price of
Rs.2550 based on SOTP. At the target price, the stock will trade at 1.8x its
FY011E adjusted book value after stripping the value of its subsidiaries
(Rs.664). The stock may remain range-bound till there is more clarity on
RBI’s proposed changes in provision coverage norms.
Key Investment Rationale
q High quality deposit franchise: SBI has used its pan India presence and
strong brand image to build a high quality deposit franchise which is visible in
terms of CASA mix. At the end of Q2FY10, low cost deposits (CASA) stood at
41% of domestic deposits, one of the highest in the industry.
At the end of Q2FY10, its CASA mix improved by 126 bps (YoY) led by strong
growth in low cost deposits (29.2%) along with retiring of high cost bulk
deposits (came down to 3.6% at the end of Q2FY10 as compared to 16.8% at
the end of Q2FY09).
q Healthy core fee income: SBI is one of the few PSU banks whose non-interest
income has grown 37.0% CAGR during FY07-09. Its core fee income
(commission, exchange & brokerage plus forex income) has grown at 30.9%
CAGR during FY07-09 in line with its asset growth of 30.5% during the same
period.
It has a healthy core fee income base, compared to other PSU banks, due to its
large government related businesses and extensive franchise covering large and
mid-sized corporate, SME and retail customers.
In FY09, bank benefited from volatility in interest rate by trading in the bond
market. This led to increase in its share of treasury profit to net revenue (NII +
non-interest income) from 2.6% in FY06 to 7.6% in FY09. We are building in
lower share of treasury profit to net revenue at 5.6% and 3.9% during FY10E &
FY11E, respectively
