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SBI – Bank in Everybody’s Portfolio – Q2 Review

November 4, 2009

sbi mg roadState Bank of India, the largest bank and banker to every Indian reported a 2Q FY10 net profit of INR24.9bn, up 10% y-o-y and 7% q-o-q. Even though NII growth was muted on a y-o-y basis on a q-o-q basis it was encouraging. The net interest margin recovered by 25bp q-o-q to 2.6%, led by the retiring of high-cost bulk deposits.

Key positives: margins, fees and costs have moved in the right direction – together. Margins were up 25bps qoq (from a low 230bps), but management’s guidance of a 10bp per quarter expansion will likely disappoint possibly higher market expectations.

Near term earnings will be subdued due to coverage increase bank will still generate mid teen ROE). By F2012, NIMs should have right-sized and coverage increased to 70%. This would be the first year of 20% ROE, with negligible contribution from trading gains.

Asset Quality:As at end-September 2009 the gross non-performing asset ratio (NPA %) was 3% versus 2.8% a quarter ago. Even though annualized credit costs dipped for the quarter, we believe that asset quality risks might not have peaked for SBI as yet.

EPS Estimates of SBI:
Morgan Stanley – 174 and 234 for fy10 and fy11 respectively
Citi – 164 and 208 for fy10 and fy11 respectively
BOFA-Merrill – 164 and 201 for fy10 and fy11
HSBC – 182 and 235 for fy10 and fy11

BUY SBI or BOB or BOI or PNB or Canara, in a way of speaking a PSU Bank which are quoting at far lower P/Es. Ofcourse on correction 🙂

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