Sunday, October 18, 2009

>Our Top Pick Among Our Large Asian Banks (MORGAN STANLEY)

SBI took a risk over the last few years, but it seems to be paying off: It grew its loan book aggressively at 28% p.a. over the last five years (up 3.5x). As such, the unseasoned loan book faced significant problems when the economy slowed. However, with IP growth picking
up and capital flows rising in India, the credit outlook has improved. We are still building in higher-than-normal provisions (112bp in F2010) in our model, but in our view the threat of substantially higher credit costs is greatly reduced. SBI is now in a position to reap revenue from its considerable asset base.

SBI’s efficiency up sharply: SBI’s profit per employee has increased about 100% in the last three years, as has balance sheet per employee. This has resulted in a noticeable improvement in cost ratios. Market share loss in fees has also abated. Over the last few quarters, SBI has been one of few banks we follow to grow fees faster than assets – and we expect this to continue. Improved costs and fees will drive core profitability.

Higher rates will be a catalyst for earnings pickup: Historical trends indicate that SOE banks should be sold when rates are rising. But these banks have reduced MTM risk to very low levels. Moreover, they are carrying substantial excess liquidity, which will benefit as rates rise. This, coupled with high CASA, implies that rising rates will drive NIMs up for SBI – which would more than compensate for any MTM loss.

Unloved stock; valuation appealing: Foreign
ownership remains close to multi-year lows at 14%. We are building in US$3bn of capital issue next year but still see 17% ROE for F2011E. The stock is at 9x F2011E earnings, 1.4x core book (ex insurance), and 5x core operating profit, one of the most attractive valuations among our Asia large cap financials, in our view.

To see the full report: SBI