'Buy' SBI shares: Liabilities are its only assets, target price Rs 1,933, says Citi

Written by Citi | Updated: Aug 19 2013, 21:07pm hrs
SBI sharesSBI management blames macro: likely a mix of high growth, poor credit and some bad luck. This is no bottom, more deterioration ahead, but on impact/disappointment it shouldn?t get worse. Reuters
It's another poor quarter, State Bank of India (SBI) shares are on a slide: its third consecutive disappointment (both BS and P&L this time). The BS (balance sheet) challenge is more severe. Guidance remains muddled and its liabilities show appears to be its only asset in the quarter and near-term.

Breadth of SBI's asset deterioration the challenge: Its not just the scale (5.4% annualised NPL slippage, 2.3% restructuring + Rs 100 bn pipeline) or the under provisioning (90 bps credit charge, LLR 60%). It is its breadth: spreading beyond mid corp/SME to large corp, agri (mgmt hopeful of pullback), and some retail. SBI management blames macro: likely a mix of high growth, poor credit and some bad luck. This is no bottom, more deterioration ahead, but on impact/disappointment it shouldnt get worse.

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SBI P&L is also grey: Its another round of pension charges that do the damage but fees are weak, trading gains are high (could reverse) and theres under-provisioning (profits still fall 14%). While margins hold out (316 bps), Managements guidance to a 350bps+ uptick and 10%+ profit growth appears optimistic.

Its more hope, less strategy: SBIs strategy/expectations (20% loan growth, rising margins and lower risk on incremental credits) are more optimistic than ours. This combination could be somewhat incompatible in the current environment and risks to this guidance are high (and mgmts track record is poor).

Could see some good around the corner: There is the odd silver lining: SBI has surplus liquidity (a boon in the current environment), monsoons have been good some of its recent agri lending challenges could reverse, the government seems a committed source of capital for SBI (unlike peers). Given the markets low expectations of SBI, this mix can lend a bit of a business and stock bounce, particularly in the context of the last quarter.

Sharp earnings and TP cuts and maybe a bounce: We cut FY14/15 earnings estimates 19%/18%we moderate our target price to Rs 1,933 (from Rs 2,860), now at 0.8x P/B (price-to-book ratio) and clearly see the business as challenged. That said, it is trading at very low multiples and could have some cyclical support near term, is in the midst of a bruising monetary macro and is set off against particularly low expectations: We see (probably hope) some stock bounce to salvage a fair erosion of value. Maintain Buy.

Our SBI target price of Rs 1,933 is based on a sum of the parts valuation in which, we benchmark the consolidated banking business off a 0.8x 1Yr Fwd P/BV (price-to-book ratio)slight premium to our benchmark valuation for its peers. We also add Rs 155 per share for its non-banking subsidiary businesses. This includes a subsidiary valuation of: Life Insurance at Rs 74 per share, SBIs asset management business (Rs 30, 5% of assets) and incorporates capital markets subsidiary at Rs 52 based on 10x 1Yr Fwd PE (price-to-earnings ratio).

Risks

Downside risks that could impede the stock from reaching our target price include: (i) A sharp rise in interest rates; (ii) Asset quality concerns continuing - given strong loan growth and a weak macro-economic environment high; (iii) Lack of liquidity or deposit growth; (iv) government involvement could be contrary to the interests of minority shareholders; and (v) A lack of capital to support growth.