Maintain Sell on SBI - Anand Rathi

State Bank of India - Lower estimates, target price; maintain Sell

We slash SBI's FY12e/FY13e net profit by 5.2%/5.3% on lower NIM assumptions and higher employee pension provisions. Hence, we cut our target price to Rs.2,393 from Rs.2,585. We retain Sell as SBI's high employee liabilities and provisions to raise NPA coverage would keep RoE lower than peers'.

CASA share improves, yet NIM decline likely. NII declined 11% qoq, led by 90bps fall in domestic credit-to-deposit to 76.3%. CASA share improved 49bps qoq to 48.7%, and grew 22.1% yoy. Yet, given SBI's rising liability costs, particularly short-tenure deposits and a stretched credit-to-deposit, NIM has little scope for gains. We lower our NII for FY12e/FY13e by 6.1%/6.6%.

Higher employee expenses erode networth. Staff costs increased 20.1% qoq due to provisions for pensions (Rs.8.8bn in 4QFY11; Rs.24.7bn in FY11). While management estimates Rs.25bn of pension provisions in FY12, gratuity provisions are likely to be lower (Rs.4bn amortized over four years). SBI also adjusted Rs.79.27bn from its reserves for previous pension provisions.

Asset quality suffers, low CAR necessitates infusion. Fresh slippages of Rs.56.5bn indicate that asset quality is still suspect; 17% of restructured loans (Rs.31.3bn) are NPAs. Additional provisions of Rs.11bn (for 70% NPA coverage) and Rs.5bn (for restructured standard loans) would limit earnings growth. The low tier-1 of 7.77% makes capital infusion paramount for business growth.

Valuation and risks. We value the standalone bank at Rs.1,753 (1.7x 1-year forward BV) and subsidiaries at Rs.640. Risks: lower credit costs; faster accretion in low-cost deposits.

The stock closed the day at Rs.2355.70, down by Rs.57.90 or 2.40%. The total traded quantity was 14.02 lakhs compared to 2 week average of 7.32 lakhs.

The stock hit an intraday high of Rs.2398 and low of Rs.2331.15.

Source : Equity Bulls

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