>STATE BANK OF INDIA (GOLDMAN SACHS)

Three reasons to own SBI; reiterate Conviction Buy

What's changed
We see three reasons to own SBI: 1) at a macro level, we believe SBI would be a key beneficiary of the economy returning back to potential growth level—33% CAGR in earnings for SBI during 2009E-2011E; 2) at a bank-specific level, we see SBI as a long-term player with a sustainable
advantage due to its strengthening competitive position—solid and stable deposit franchise, higher and rising productivity compared with its peer group of state-owned banks with prospects of further improvement through potential mergers with its subsidiary banks in the long term; and 3) likely relative valuation change reflecting the potential cyclical upside to earnings and its strengthening competitive position in the long term. We reiterate Buy, on Conviction list, and our 12-m TP of Rs2,280.

Implications
Trading at 2010E P/PPOP, P/E and P/B of 3.2X, 6.4X, and 1.1X, respectively, versus the regional average of 8.2X, 14.6X and 1.9X, we believe SBI’s valuation presents a compelling investment argument both in relative and absolute terms, within India and in the region. In our view, the market seems to be concerned about a tougher outlook for growth for SBI in 2009 and its lower loan loss reserves. While the tougher growth outlook is factored into our expectations, we believe the risk to capital from low loan reserves is insignificant given SBI’s net NPA/equity ratio of 15% in 2008.

Valuation
We derive our 12-m TP of Rs2,280 for SBI using SOTP methodology. At current multiples, SBI is trading ahead of its historical median of 0.9X P/B. However, given its ROE of 18% for 2010E, we believe it should trade well above its historical median and current multiples.

Key risks
Key risks include: 1) increase in interest rates and 2) deterioration in SBI’s asset quality outlook.

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