State Bank of India
Recommendation: Buy
CMP = Rs 2, 209
Price target: Rs 2,625
Key Points:
- I have been mentioning that the banking sector would continue to remain an outperformer in the current market scenario and so it has, with the Sensex reporting a gain of 10% in the last one month and Bankex reporting a growth of 17% in the same period.
- The public sector behemoth State Bank of India (SBI) remains one of the top picks in the banking space and I have stated below five reasons why I feel SBI should be a Buy at the current levels:
- Upcoming rights issue—at a price far higher than envisaged earlier
- Guidelines on holding companies by the Reserve Bank of India (RBI) expected in November 2007
- New business initiatives—general insurance, private equity
- Launch of PSU Bank Benchmark Exchange Traded Scheme (Bank BEES)
- Other positive news flows and developments that are expected going forward.
ICICI Bank
Recommendation: Buy
CMP = Rs 1,241
Price target: Rs 1,528
Key points:
- During Q2FY2008, the core earnings of ICICI bank remained under pressure as retail loans grew at a slower rate and the pressure on spreads continued due to higher deposit costs. However, a large portion of corporate bulk deposits would get repriced in Q1FY2009, which would ease the pressure on spreads going forward.
- The branch network of the bank increased to 950 branches from 755 in the first six months of FY2008 (post Sangli bank's merger with ICICI bank). The bank also received licences for opening 425 new branches over the next 12 months.
- The bank reported a 317-basis-point improvement in its current and savings account (CASA) ratio to 25.3% driven by higher current account balances during Q2FY2008. The bank is doing all the right things by building more branches and increasing its CASA base to reduce its reliance on high-cost bulk deposits.
- The improvement in the cost of funds resulting from the higher CASA ratio is expected only in medium to long term with the increase in branch network. A large portion of high-cost bulk deposits are expected to get repriced in Q1FY2009, which along with the improvement in the CASA ratio should help in improving the spreads going forward. Till then the spreads are likely to remain at current levels.
- The bank's return on equity (RoE) is likely to remain depressed at 10.5% for FY2008E and FY2009E after the massive capital raising (Rs 20,000 crore raised from primary markets) undertaken by the bank. The low RoE has remained a concern for ICICI Bank, but I expect things to change going forward.
- With new preference share guidelines in place (more capital raising options available to banks in future resulting in lower equity dilution), a positive outcome on the holding company guidelines from the Reserve Bank of India (that would allow the subsidiaries to take care of their capital needs) and a change in its business model (more branch building expected going forward which should improve its spreads) will help ICICI bank in restoring RoE much faster and then improving the same.
- I maintain Buy call on this stock with a price target of Rs. 1,528 and time frame of 6-8 months.
