Is SBI Really that Bad to be worth just Rs 1625 ?

SBI 2013 Earnings AnalysisIn a Research note a Week ago, Morgan Stanley Downgraded India’s Sovereign bank the State Bank of India – SBI to a Sell with a Target price of Rs 1625. Some of the concerns raised by Morgan are – Revenue progression (loan growth plus fees) likely to be tepid given slowdown in economic growth, Asset quality will likely remain under pressure, given peak lending rates and slowing growth, Core Tier I capital ratio is one of the weakest amongst Asian peers and Multiples could be under pressure as revenue growth slows and asset quality pressures increase.

SBI announced its Results for the 9 Months ended Dec-2012. The Bank reported 3QFY13 PAT of INR34bn. NIM declined further to 3.31% from 3.34% in the previous quarter helped by improved international spreads and stable investment yields. Loan and deposit growth both came in at 16% y/y, with a stable CASA ratio of 45.5%. Core fees remained weak, although there was a sharp acceleration in treasury income on the back of buoyant debt and equity markets.

Due to the rise in slippages and lower write-offs q/q, gross NPLs rose 9% q/q. There was not too much lumpiness in slippages. The largest account that slipped was for INR 2.99bn. Management guided that (1) NPLs have peaked and (2) of the INR 82bn of NPLs that slipped during the quarter, INR 20bn has already been upgraded so far in 4QFY13 as these were restructured.

Here are various Research / Brokerage houses Views and Target price for SBI Stock
Nomura – EPS of 250 for FY 14 and a Target of Rs 1950
Standard Chartered – EPS of 231 for FY 14 and a Target of Rs 1850
Deutsche Bank – EPS of 319 for FY 14 and a Target of Rs 2620
JP Morgan – EPS of 350 for FY 14 and a Target of Rs 2600
UBS – EPS of 255 for FY 14 and a Target of Rs 3000
Goldman Sachs – EPS of 210 for FY 14 and a Target of Rs 2420

Our View – While stresses continues, one can draw comfort that new restructurings have declined, recoveries/ upgrades should see a pickup in 4Q and loan growth remains steady. The stock has corrected over the last few days and downside potential may be limited, certainly not Rs 1625 as quoted by Morgan Stanley.