>STATE BANK OF INDIA: Change in Asset Quality Outlook

Change in asset quality outlook: SBI management indicated that gross and net new NPL formation during F1Q13 could be at ~Rs50bn and ~Rs30bn, respectively. This is higher than the outlook of Rs40-45bn quarterly slippages run-rate and Rs60bn of net new NPL creation in FY13, mentioned during our summit held in early June 2012. (See India Summit 2012: Day 1: A Confluence of Macro and Micro dated June 6, 2012). Management indicated that F1Q13 credit costs could be around 120bps. Restructuring during the quarter could be in the range of Rs20-25bn.


No change in outlook on NIMs, loan growth for F2013: Management expects margin to remain flat QoQ in F1Q13 and decline by 10-15bps to 3.7-3.75% in FY13. On loan growth, it continues to expect ~15% in F2013, similar to last year levels.


Our view: We continue to believe that asset quality pressures will intensify in F2013. However, since we are in a corporate NPL cycle, the flow of bad loans will be lumpy. In our view, the key now is duration of slowdown. Our economist, Chetan Ahya, projects that Indian GDP growth could be ~6% for the next four quarters – implying six quarters of ~6% growth (including the last two quarters). As the slowdown becomes entrenched we are likely to see continued impairments. We maintain our Underweight rating on SBI. Our current forecasts assume credit costs of 112bps (PAT sensitivity of -5% to 10bps increase in credit costs) and margin decline of ~30bps (PAT sensitivity of +7% to 10bps increase in margins) for the parent in FY13. Given this, our PAT estimate for SBI’s parent is 17% lower than Bloomberg consensus. SBI is currently trading at a 1.2x P/BV and 9.1x P/E for FY2013e. Our current price target of Rs1,425 implies 33% downside to the current market price.


To read report in detail: SBI


RISH TRADER