Analyst Corner: Maintain ‘buy’ on SBI, target price unchanged at Rs 405

March 7, 2020 3:15 AM

Yes Bank has a high level of stressed assets (net NPA of 4.4% and sub-investment grade standard loans at c14% of loans) and a weak capital position (CET1 of just 8.7%).

sbi, state bank of indiaIt appears highly likely that SBI will have a key role in whatever capital support plan is engineered by regulators and the government during the moratorium period of one month.

By HSBC Global Research

Media reports indicate SBI is highly likely to be pulled in for a rescue of Yes Bank. Yes Bank has been put under a moratorium; the role of SBI in a resolution plan for Yes Bank still unclear. Maintain ‘buy’ with unchanged target price of Rs 405.

On March 5, the RBI, in consultation with the government, put troubled Yes Bank under moratorium. Thus, for a period of one month, depositor withdrawals are capped at `50,000. For this period, the RBI has suspended the board of Yes Bank and the former DMD and CFO of SBI has been appointed as administrator for Yes Bank.

Media reports have also indicated that the government has asked SBI to lead a consortium to explore buying a stake in Yes Bank. Reports further suggest that SBI, along with LIC, could take a 49% stake in Yes Bank through a preferential share issue, priced at `2 per share. This is a 95% discount to the closing price of `36.8 on March 5.

Yes Bank has a high level of stressed assets (net NPA of 4.4% and sub-investment grade standard loans at c14% of loans) and a weak capital position (CET1 of just 8.7%).

It appears highly likely that SBI will have a key role in whatever capital support plan is engineered by regulators and the government during the moratorium period of one month. A good part of fund commitments to bridge the gap between Yes Bank’s capital funds (`512 billion of Tier I and Tier II capital funds as at end-September 2019) and write-downs on stressed loans (`578 billion across NPAs, sub-investment grade loans, stressed real estate and telecom exposure) could fall on SBI.

Vulnerability of the financial system to insolvency of a bank of the size of Yes Bank has forced the regulator and the government to take charge of the situation. However, SBI bearing the cost of the potential rescue plan is a near-term risk for the bank. With little detail of the plan available in the public domain, we retain our estimates and `405 TP on SBI. Our ‘buy’ rating is predicated on FY21-22e RoE recovery along with an undemanding valuation (1.0x FY21e consol BV). However, we expect commitments and distraction related to the resolution of Yes Bank to be an overhang in the near term.

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