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

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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 shouldn’t get worse. Reuters 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 shouldn’t get worse. Reuters
SummaryThere is the silver lining: SBI has surplus liquidity, monsoons have been good.

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: It’s 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 shouldn’t get worse.

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

It’s more hope, less strategy: SBI’s 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 mgmt’s 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 market’s 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

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