State Bank of India Ltd: Buy
CMP: Rs.176
Target: Rs.250
Time Period: 6 months
Introduction: State Bank of India is an Indian multinational, public sector banking and financial services company. It is India’s largest commercial bank..Founded in 1806, Bank of Calcutta was the first Bank established in India and over a period of time, evolved into SBI. SBI represents a sterling legacy of over 200 years. It is the oldest commercial Bank in the Indian subcontinent, strengthening the nation’s trillion-dollar economy and serving the aspirations of its vast population. The Bank is largest commercial Bank in terms of assets, deposits, profits, branches, number of customers and employees, enjoying the continuing faith of millions of customers across the social spectrum. Its banking activities include Personal Banking, Agricultural/Rural, NRI Services, International Banking, Corporate Banking and Services.
State Bank of India is a regional banking behemoth and has 20% market share in deposits and loans among Indian commercial banks.As of 2014-15, it has assets of INR 20,48,080 crores and more than 14000 branches, including 191 foreign offices spread across 36 countries, making it the largest banking and financial services company in India by assets.
The Indian government holds a majority of the bank's equity. As of March 2015, more than half the bank's advances were made to corporations, while 19% were made to retail consumers and 10% to the agricultural sector. SBI's $300 billion deposit book is India's largest and has 55% in the form of term deposits, 36% in savings deposits, and 9% in current accounts.
The Indian government holds a majority of the bank's equity. As of March 2015, more than half the bank's advances were made to corporations, while 19% were made to retail consumers and 10% to the agricultural sector. SBI's $300 billion deposit book is India's largest and has 55% in the form of term deposits, 36% in savings deposits, and 9% in current accounts.
Shareholding Pattern: The promoters' hold 61.32% while the general public holds, 38.68%. Among the general public the Mutual Funds hold 6.01% while FIIs hold 9.25% and Insurance Companies hold 12.87%, each.
Financials: For Q3FY16, the SBI came out with an income of Rs.46,731.01 Cr as compared to Rs.43,783.98 Cr in the same period previous year. Its net profit for Q3FY16 came as 1,115.34 Cr as against Rs.2,910.06 Cr in Q3FY16.
On Consolidated basis, for Q3FY16, the company came out with a total income of Rs.6,75,938.90 Cr and a net profit of Rs.12,594.90 Cr as against a total income of Rs.6,46,046.20 and a net profit of Rs.38,282.00, in the same period previous year. However, the things are going to improve on the positive side due to the enforcement of the Bankruptcy Act.
Conclusion: The book value of the shares of the company is Rs.165.49 and it has an EPS of Rs.16.10. At the CMP of Rs.176, it has a market cap of Rs.138,837.27 which is less than the total revenues of Rs.1,74,972.96 Cr in FY15 and is almost equal to 9MFY16 is Rs.138316.69. Hence, there is enough scope of the improvement of performance of the shares of SBI.
One of the greatest advantages of the SBI is its ability to cross-sell fee products to its large depositor base. Historically, the bank generated 40% of revenue from fees, but this has steadily declined to 36% in 2014. Many of the analysts feel that SBI would build on its competitive advantages and continue generating excess returns, despite majority government ownership. HDFC Securities in its February, 2016 research report writes:
One of the greatest advantages of the SBI is its ability to cross-sell fee products to its large depositor base. Historically, the bank generated 40% of revenue from fees, but this has steadily declined to 36% in 2014. Many of the analysts feel that SBI would build on its competitive advantages and continue generating excess returns, despite majority government ownership. HDFC Securities in its February, 2016 research report writes:
With a surgical stress recognition process in place, we think the affected financials are close to bottoming out, esp. SBIN. Core performance remains ahead of PSB peers, with a mere <10bps 3q="" and="" better="" casa="" decline="" despite="" dip="" fees="" flat="" growth="" higher="" improvement="" in="" nim="" opex="" p="" pcr="" pick-up="" the="">
With the possibility of stress even in 4QFY16, our earnings and ABV fall by ~32% and 23/30% for FY16/17E. SBIN remains our preferred bet among PSBs given it’s relatively overall lower stressed assets (6.4% of loans), higher PCR at 65%, superior CET I -9.6%, liability franchise, diversified loan book and better return ratios. Disinvestments in non-core assets, non-banking subsidiaries and repatriation.
The bank expects further pick-up in roads,railways, defence and ports. We expect loan CAGR of 14% over FY16-18E. SBIN is better placed vs. peers given its lower proportion of restructured assets, continued decline in impairments in stressed segments and falling proportion of SMA II. However, given the slow macro recovery and elevated slippages (driven by AQR), we factor in slippages of average. ~3.12% FY16-18E vs. 2.3/3.7% in FY15/14.
Besides, WPI inflation in April came in positive for the first time in last 18 months, rising to 0.34% compared to negative 0.85% in preceding month, indicating that slowly the economic deflation is fading away. If the economy starts to pick up steam, the best proxy sectors should be Banks and NBFCs. Therefore, buy the shares of State Bank of India Ltd at around Rs.176, for short term targets of Rs.225-250.
