SBI gets a thumbs up from analysts on strong Q2 numbers

Mumbai: Analysts have given the thumbs up to State Bank of India following its strong results for the quarter to September as it used the one-time gain from the sale of SBI Life Insurance shares to clean up its books and raised provisions coverage to more than 80 per cent, the highest in more than a decade.The state-owned lender’s net profit surged more than threefold during the quarter to Rs 3,012 crore.“Amid a weak macro, SBI delivered a surprisingly strong quarter, especially on asset quality and margin,” Nilanjan Karfa, analyst at Jefferies, said in a note. “The offset were the muted fee income and downward trending loans growth. While we hesitate to extrapolate the asset quality numbers, IBC (Insolvency and Bankruptcy Code) recoveries could surprise on the upside and keep credit costs under control.”The financial services company revised its earnings estimate for SBI upwards for the current year by 6.8 per cent, factoring higher margins and proceeds from SBI Life Insurance stake sale. However, it cautioned that higher than expected slippages from stressed corporate groups and delay in recoveries could lead to higher credit costs.Motilal Oswal Institutional Equities too raised its estimate for the bank’s earnings in this financial year. “Bank reported a moderation in slippages across segments while it prudently used the gain from the stake sale in SBI Life to create higher provisions,” the brokerage said in a report. “The bank carries sufficient provisions to cushion earnings; however, given the macro slowdown and the limited visibility on the resolution of large stressed accounts, we expect credit cost to stay elevated over the near term. Margins have improved but appear to have peaked out as monetary easing continues exerting pressure on incremental yields.”The asset quality of the bank surprised on the positive side, with fresh slippages coming in at Rs 8,800 crore against Rs 10,725 crore a year ago. The figure was Rs 16,212 crore at the end of the June quarter. The gross NPA (non-performing assets) ratio fell 276 basis points to 7.19 per cent, as against 9.95 per cent a year ago. The net NPA ratio was at 2.79 per cent and the overall PCR (put-call ratio) increased to 81.23 per cent. A basis point is one-hundredth of a percentage point.“Yes, the numbers were good this quarter, but the problem remains — how sustainable they are,” said Suresh Ganapathy of Macquarie. “With exposure of Rs 40,000 crore plus to telecom groups, exposure of Rs 13,500 crore to DHFL (including loans, bonds and buyouts), the provision that they carry is less than 20 per cent. And telecom nothing much… Plus there is this agri and SME (small and medium enterprises) thing where we may never know how slippages behave.”Nomura maintained its ‘buy’ rating on the state-owned lender but reduced its target price from Rs 420 to Rs 400. That means a potential upside of 42 per cent. The brokerage said SBI’s Q2 asset quality beat its estimates. The brokerage expects the return on equity (ROE) of 13.5-14 per cent for the stock.HDFC Securities said the bank surprised with a sharp improvement in performance across fronts as net interest margin expanded and coverage improved. It reiterated ‘buy’, however, adding they were a tad weary of the sustainability of this pace of improvement. “No material progress has been on large IBC cases and further standard exposure to vulnerable sectors/entities does not bode well for stress; the recent spate of ratings downgrades does not help, either. Still, the worst in terms of asset quality is long behind,” the brokerage said. It has a target of Rs 389, translating in potential upside of 38 per cent.

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