Recommendation: Buy
CMP = Rs 2,405
Price target: Rs 2,680
Result highlights:
- The public sector behemoth State Bank of India (SBI) reported a profit after tax (PAT) of Rs 1,808.6 crore for Q3FY2008, beating our estimate of Rs 1,413 crore. The PAT was up 69.8% year on year (yoy) and 12.3% quarter on quarter (qoq) on the back of a strong all-round growth. On a consolidated basis, the Q3FY2008 PAT stood at Rs 2,442.3 crore, up 55.1% yoy and 10.8% qoq.
- The net interest income for the quarter stood at Rs 4,256 crore, registering a robust growth of 23.8% yoy on the back of a strong growth in the advances and an improvement in the net interest margin (NIM).
- The NIM during the quarter improved by eight basis points sequentially on the back of an improvement in the yield on assets, which was partially offset by the higher cost of funds. On the year-on-year (y-o-y) basis, the NIM continued to remain under pressure. However, we expect the NIM to improve going forward as the high-cost bulk deposits raised earlier get repriced at lower rates.
- The non-interest income witnessed a whooping growth of 48% yoy to Rs 2,697 crore on the back of jump in treasury income and foreign exchange (forex) income. The treasury income was up 107% yoy to Rs 644 crore while, the forex income tripled yoy to Rs 431 crore. Meanwhile, the core fee income growth was robust at 19% yoy.
- The operating expenses during the quarter grew by 13.2% yoy to Rs 3,294 crore. The growth was mainly due to a 25.2% y-o-y increase in the other operating expenses as the bank expanded the coverage of its core-banking solution (CBS) platform aggressively. Asset quality continued to improve further during the quarter as evidenced by a sequential reduction of Rs 220 crore in the net non-performing assets (NNPA), while the gross non-performing assets (GNPA) were largely stable at Rs 10,641.
- The capital adequacy ratio at the end of December 2007 stood at a comfortable 12.3% compared with 12.8% for the previous quarter and 11.9% for the year-ago period. Besides the strong stand alone performance, SBI's various subsidiaries and associate banks continued to clock a healthy growth. Notably, SBI Life, the life insurance arm of the bank, reported a PAT of Rs 37.7 crore compared with a loss of Rs 33.5 crore for the year-ago period.
- Following the bank's announcement of its plans to merge the associate banks in itself, the labour unions for the public sector banks have declared their strong opposition against the merger plan. A recent meeting between the Indian Bankers Association and the labour unions on their demands has not yielded any results. Meanwhile, the proposed merger of the State Bank of Saurashtra has received a nod from the boards of both the banks.
- At current market price of Rs 2,405, SBI trades at 22.5x its 2009E earnings per share, 8.9x its 2009E pre-provisioning profit and 2.6x its 2009E book value.
- I would recommend Buy option on this stock with price target of Rs 2,680 in the next 6 months time frame.
