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Published on 2/12/2019 10:06:57 AM | Source: Dolat Capital Market Pvt Ltd

Accumulate State Bank of India Ltd For The Target Rs.315 - Dolat Capital

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* The bank reported a loss on account of higher credit costs. Including the exceptional item, the profit has been ` 30bn.

* The bank has not taken the benefit of the new tax rate (at this juncture), as it would like to consume the DTA. We have factored a higher rate and consume the DTA in the year.

* Despite the higher credit costs, GNPA reduced by 10 bps on account of lower slippages (155 bps). The quarter did not witness lumpy slippages. However, this trend is highly evolving. DHFL is likely to slip next quarter, thereby increasing the run rate. We have only marginally reduced our slippages estimate.

* We believe the resolution of the large steel account is on the verge of conclusion in its principle form. The SC has been hearing the case on a daily basis and is likely to have concluded the hearing in the case. We believe the ABV is likely to increase by 7% with this recovery. We like the bank for its ability to gain market share, amidst consolidation among PSUs, key resolutions and ability to maintain its operating performance. We have not factored the recovery of Essar steel. It is likely to improve the book value by 7%. We value the bank at 1.2x FY21E P/ABV, we maintain Accumulate.

 

Slippages normalized but can’t be taken for granted

The slippages of the bank were 46% QoQ at ` 88 bn. This is the likely steady state rate. However, accretion of lumpy accounts, esp. in financial services is monitorable. With the current stress, we believe slippages are likely to remain elevated. DHFL and RCAP are a concern in H2FY20. The bank made additional provisions for a power account and for DHFL. The coupled with improving PCR, increased credit costs to 234 bps (197 bps on advances (tad lower by 9 bps). We have maintained slippages at 180 bps for the year and GNPA at 5.9%, excluding recoveries. Recoveries in the steel account is a positive trigger.

 

NIMs improves, leading to a healthy operating profits

Domestic NIMs for the bank improved 30 bps, aiding an overall NIM improvement by 21 bps to 3.2%. The operating profit rose 20% YoY despite advance growth in line with the industry. We believe advances are likely to grow at CAGR 11% over FY19-21E. We have factored a RoA at 30/60 bps for FY20/21E. The bank plans to divest the cards business, which is not factored in. The resolution of Essar is likely to improve RoA to 60 bps in FY20.

 

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