>STATE BANK OF INDIA (GOLDMAN SACHS)

Concerns about loan restructuring likely to fade; still Neutral

News
SBI reported a much larger than previously reported figure for loan restructuring in its detailed financial report. The detailed financial report was published on June 5, 2009. Restructured loans as of 31 March 2009 at the parent level stood at Rs130 bn versus Rs83 bn reported on 9 May 2009 when it announced the results for 4Q2008. Further, the detailed financial statement also reported that Rs90 bn of loans would be restructured in 2009 taking the total value of restructured loans to Rs220 bn. We believe this surprised the market expectations negatively and pushed down SBI’s share price by nearly 4%.

Analysis
The total loans restructured including those to be implemented in 2009 for SBI would be 4% of loans. Market expectations would likely be impacted by two factors: 1) negative surprises from under-reporting stressed assets; and 2) higher restructured loan levels than reported by its peers thus far. PNB (PNBK.BO) and BOB (BOB.BO) reported stressed asset levels of 3% (proportion of loans restructured, including those to be implemented in 2009), while ICICIB (ICBK.BO) reported 1.4% with the potential of it being revised upward as more borrowers could seek loan restructuring. This could raise market concerns about banks potentially facing higher levels of NPL and credit cost. However, as our Economists believe the economy could get back to trend growth level over the next 24 months, we believe such concerns of the market would likely be transient and unlikely to affect expectations of earnings growth.

Implications
Maintain Neutral and 12-m target price of Rs1150 for SBI, based on SOTP methodology. Upside risks: higher than expected demand for loans and lower credit costs. Downside risks: government policies that could negatively influence the economic environment and interest rate outlook.

To see full report: STATE BANK OF INDIA