Buy State Bank of India; target of Rs 390: ICICI Direct

November 29
05:42 2017

ICICI Direct’s research report on State Bank of India

After a soft Q1FY18 (first quarter when merged financials were announced) in terms of asset quality, SBI reported an improved Q2FY18 performance with slippages lower at Rs 10627 crore vs. Rs 30059 in Q1FY18. Corporate slippages were at Rs 4538 crore (54% from watch list). As per the management, going ahead, corporate slippages would largely occur from watch list. The watch list fell 13% QoQ and is now at Rs 21288 crore. Stressed assets (GNPA + RA) were at Rs 220139 crore (11.6% of loans) vs. Rs 227406 crore (12.05% of loans) in Q1FY18. Including accounts under SDR & S4A, overall stressed assets are below 14%, better than peers.

Merger with associate banks resulted in huge NPA stress and subsequently muted earnings in Q1FY18. However, the performance improved in Q2FY18 with slippages down considerably. Post complete integration, business growth will remain in focus. We believe capital raising via QIP, inflow of ~Rs 5000 crore from SBI Life stake sale and large capital infusion announced by the government, would be sufficient to meet provisions, growth requirements ahead. Capital adequacy ratio (CAR) is at 13.9% in Q2FY18 with Tier 1 capital at 10.9% Return ratios are expected to take longer to improve due to lower profits in merged entity. However, long term structural value of the bank remains intact. We revise our target price higher to Rs 390/share, valuing the merged bank at 1.8x FY19E ABV (Rs 168/share) and subsidiaries at Rs 79/share. Strategic stake in non-core investments like NSE (5.19%), BSE (4.75%), NSDL, ARCIL, UTI AMC, etc, may add further value, not factored in by us. We reiterate BUY.

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