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Worst not over for State Bank of India, expect 25% downside: Morgan Stanley

Dec 21 2013, 11:10 IST
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SummaryThere have been material earning downgrades this year (FY15 consensus estimates have been cut 24%), but we are still 23% lower.

Non-performing loans (NPL) formation stabilising (at high levels) and RBI not tightening raises the question: Is the worst over?

We don’t think so. ROEs will continue to fall (we are 23% below consensus for Fy15E). Coverage is low; capital raising will continue; valuation is not cheap. We are ‘underweight’. We are including capital issues (preferential allotment to government and potential QIP) in our estimates. Even after the capital issue (approximately 10% dilution), tier 1 for SBI will be approximately 9.6% (almost all private banks in the region are well above 10%).

There have been material earning downgrades this year (FY15 consensus estimates have been cut 24%), but we are still 23% lower.

Pressure will be all round with weaker loan growth, weaker NIMs, weaker fees and higher costs. At the same time, credit costs will stay high given the bank had been pushing provisioning out for last two to three years, even if NPL formation slows. RoE will average approximately 10.5% for FY16e.

We believe the bank needs a meaningful pickup in growth to get out of the NPL problem. That is unlikely to happen. In this scenario, private banks will take market share in good loans from SBI/SOE banks. Also, ROE differential of private banks against SBI will keep rising, helping them to continue outperforming.

The change in our target price for SBI reflects rolling of the base forward by 12 months to March 15. Revenue progression (loan growth plus fees) likely to be tepid given slowdown in economic growth.

Morgan Stanley

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