Buy SBI; target of Rs 2592 For Today 3-june 2013

Buy SBI; target of Rs 2592 For Today 3-june 2013

"SBI's asset quality showed significant improvement, in line with the management guidance. Fresh NPL formations declined, NPL recoveries and upgrades increased and coverage ratio too saw a QoQ improvement. While the balance sheet growth was strong NIM saw some pressure. However, the NII and net profit were below expectation. Higher than expected pressure on NIM impacted the NII growth while higher than expected staff expenses and provisions impacted the profitability. The low tax (on account of deferred tax credit) aided in supporting the net profit.

Overall asset quality for the bank improved with QoQ decline in gross and net NPLs, both in absolute amount and  percent basis. Fresh NPL formations at Rs 58.7bn was significantly lower than Rs 81.8bn in Q3FY13. Even excluding the accounts which were restructured and thus got upgraded in the NPL pool, the NPL recoveries and upgrades saw a noticeable improvement. We believe that the asset quality should largely be maintained as corporate delinquencies (both large and mid corporates combined) are expected to reduce albeit moderately going forward and retail NPL remain stable.

While the rise in restructured loans of Rs 86.7bn was higher than expected, the total potential pipeline for restructured loans is now significantly lower. Three accounts (Suzlon Rs 18bn, Sasan Power Rs 11bn and Jindal Thermal Rs 5.3bn) account for almost 40 percent of the incremental restructuring in Q4. The sharp jump in provisions was largely due to the higher NPL provisions. This led to a noticeable improvement in coverage ratio to 66.6 percent from 61.5 percent in Q3, which we view as a positive.

Loan and deposit growth has been strong at 21 percent YoY and 16 percent YoY respectively. The loan growth was largely driven by the large corporate and international loan book. Going forward the bank would continue to grow at around 20 percent with focus on large corporate accounts and mid corporate accounts with better risk profile. The mid corporate and SME segment which has been witnessing stress grew at lower rate of 17 percent YoY and 19 percent YoY respectively. Within the retail loans which grew 15 percent YoY, mortgage loans and auto loans saw increased traction and grew at higher rate of 16 percent YoY and 35 percent YoY respectively.

NIM saw a 14bps QoQ pressure due to lower loan yields. The shifting of pension fund investment to separate fund also impacted NIM. We believe that NIM could witness some pressure over the next couple of quarters as domestic NIM stay flat at best and NIM on international loan book see moderate pressure.

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