>SBI(HSBC)

Earning drivers rebound. State Bank of India (SBI) reported a 2Q FY09 net profit of
INR22.6bn, up 40% y-o-y and better than our estimate of a net profit of INR20.5bn.
Strong growth in both revenue drivers, i.e. net interest income (up 45% y-o-y) and noninterest
income (up 15% y-o-y), helped shore up the bottom line this quarter. It is
interesting to note that each of these revenue drivers grew at a single-digit rate in the
preceding quarters of FY08. In that context, revenue drivers are seeing some rebound, but
sustaining them would be crucial to maintaining profitability.

Signs of aggression visible, but with a cost. SBI showed aggressiveness as it continued
to grow its business well above the sector average. Loan growth of 38% y-o-y and deposit
growth of 28% at September-end defied signs of a slowdown. However, the timing of
SBI’s growth drive during the business downcycle may be less than ideal. This was
reflected in loan loss provisions, which increased markedly in 2Q following a writeback in
the preceding quarter. Because SBI’s loan loss coverage ratio stands at a mere 47% at
September-end, much lower than that of its peers BOB (at 77%) and PNB (at 75%), we
believe risks due to rapid loan growth may not be adequately covered.

Assume higher cost of equity, credit costs. We have raised our FY09-FY11 credit cost
estimates in view of the strong loan growth and deteriorating asset quality. We have also
raised our cost of equity assumption to 15.5% from the 13.5% we assumed earlier, in view
of the deteriorating macroeconomic environment. Increase in credit costs is the key risk.

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