INSUBCONTINENT EXCLUSIVE:
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
SBI also said that Loss Given Default (LGD)under IND-AS will be nearly 55 per cent vs
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.
