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Morgan Stanley has an overweight rating on State Bank of India with a target price of Rs 425.
The current market price of State Bank of India is Rs 295.85.
Time period given by the asset management firm is one year when State Bank of India price can reach the defined target.
Morgan Stanley's view on the company:SBI reported material decline in bad loans, in line with our thesis of NPL normalization: Its stock of bad loans declined Rs140bn (-6 per cent QoQ), reducing its ratio to nearly 12.1 per cent,vs.
12.4 per cent in F4Q18 and 15.1 per cent in F1Q18.
Coverage on bad loans was nearly 50 per cent,up from nearly 40 per cent two quarters back.
SBI continued to take aggressive provisions; coupled with bond losses, these drove a reported loss.
But earnings are likely to start normalising from F2H19.
Reducing bad loan and provision estimates; raising book value nearly 4 per cent: Quicker reduction prompts lowering our estimate of impaired loans to nearly 9.5 per cent of loans by F19 from nearly 11.5 per cent as recoveries pick up pace.
SBI also said that Loss Given Default (LGD)under IND-AS will be nearly 55 per cent vs.
our 60 per cent estimate.
This reduces capital requirement (by our estimate) 40 per cent, to US$3bn from US$5bn.
The bank may decide to maintain CET1 around 9 per cent for some time, which reduces the need for quick capital raising.
We are now not building in any capital raising.
Strong underlying earnings progression: Reported NIM was 2.8 per cent (2.55 per cent ex one-off), strong vs,2.45 per cent in F4Q18.
NIMs should keep trending up as new bad loan formation slows.
Reported slippages were Rs140bn, of which Rs34bn was from the watch list and Rs44bn was new exposures to existing NPLs.
There was Rs65bn of retail, SME,and agri slippage, which is seasonal.
SBI maintained its guidance for Rs400bn in slippages for F19 (Rs140bn in F1Q19).
Wearevaluing SBI on our basecase once again: Our prior probability-weighted price target was driven by concerns that SBI might be asked to bail out other SOE banks.
This concern has abated,given LIC's likely investment in IDBI.
We raise our parent valuation to Rs335 (from Rs260) to reflecthigher book value and earnings.
We also raise our valuation for subsidiaries to Rs90 (from Rs80) because their performance has been strong.
Adjusted for subsidiaries, the stock is trading at 0.8xF20e book and 3x core PPoP.
