Why should an investor buy the stock? There are a few headwinds near term – potential rights
issue, Mr. Bhatt’s retirement, potential NIM compression and asset quality issues. These are
likely to keep the stock volatile over the next 3-4 months. But, we remain very positive over 12
months and SBI remains one of our key Asian picks for 2011.
Cyclical concerns: NIM compression, asset quality. We agree that current NIMs (3.4%) are
unsustainable, and were driven by higher lending rates; an increase in LD Ratio, which helped
more assets to be financed by CASA and the lag with which deposit rates trickle through
earnings. We assume 30-35 bps NIM compression over next 5 quarters from current peak levels.
However, this should be mitigated by lower credit costs.
deposit franchises. SBI’s market share in retail demand deposits (most sticky deposits) has risen
from 20% in F2007 to ~24% now and incrementally it’s running at almost 30%. On fees income
too, SBI’s market share is increasing fairly rapidly. Its ROA from lending business is at 0.94%
from 0.5% in F2005. These factors show that the structural improvements at SBI will continue.
