SBI.BO, State Bank of India (Rs2,952.85) /Structural vs. Cyclical
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.
Structural improvements continue unabated. In our view, the best banks are ones with strong
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.
UCO Bank has reported Q2FY2011 below market estimates. It
posted PAT of Rs 119 Cr down 42.6% YoY basis due to higher
provisioning which went up by 310% during the quarter as the
bank was struggling with higher gross NPAs. On QoQ basis PAT was
down 54.2%. However taking into consideration bank's three
pronged strategy we believe that worst is over for the bank and
we expect a better quarterly result hereafter. During the analyst
meet, Management of the bank indicated three pronged strategy
ie improvement of CASA, improvement in Quality of asset and
better HR policies targeted at cost reduction.
Key Highlights
Higher provisioning and higher operating expenses led to the
bank’s reduction in PAT to Rs 119 Cr by 42.6% on a YoY basis &
54.2% on a Q‐o‐Q basis. Operating expenses went up by 37.4%
on YoY basis, while its Net NPA in % terms scaled higher to
1.18% as compared to 1.01% in corresponding quarter last
year. However CAR improved to 13.6% as compared to 11.8%
in Q2FY2010.
UCO Bank is set to show better performance over the next 2
years as it improves NII and asset quality. We expect the stock
to get re‐rated significantly, as asset quality improves
gradually in FY11 & FY12. Also its capital adequacy problems
have been solved by the recent equity infusion by the Govt, to
the tune of about Rs1125cr in the last 6 months.
The Bank's C‐I Ratio has reached an all time low of 42.8% in
Q2FY11, and we expect it to go down further in FY12. The
effective tax rates will go up to 33% by Q2FY12 as the bank
comes under full taxation; however FY11 it would be enjoying
set off against carry forward losses. On the NPA side, we
expect the asset quality to improve substantially from Q2FY11
onwards, as the bank has increased focus on recoveries and
also technical write‐offs and NPAs likely to turn good.
UCO Bank trades at substantial discount to its peers and
deserves a better valuation in light of improving
fundamentals. The stock is currently trading at 1.6x and 1.3x
on P/BV basis of FY11 and FY12 book value respectively and
P/ABV 1.9x & 1.5x its FY2011 & FY2012 Adjusted book value.
We are extremely optimistic on the prospects of this bank
hence recommend a strong BUY with a price target of Rs 215,
implying about 55% return, in 12 months period.
