State Bank of India’s operating profit surged 67.8% y-o-y, presenting an impressive platform for growth.

However, the decision of not increasing lending rates following the hardening of policy rates in Q109, led to contraction of NIM from 3.27% to 3.03% y-o-y.

Although, it has increased its PLR to 13.75% in August 2008, this will impact a smaller proportion of the loan book as against increase in deposit rates (also announced in August) which will continue to burden the bank with increased cost of funds. Thus the pressure on NIM is unlikely to abate in the short term.

The non-interest income recorded a 111% increase y-o-y, out of which core fee income grew by 45%. This was on account of an aggressive increase in the number of branches as well as their technological up gradation.

However, with an imminent slow down in industrial production and trade, combined with a softening investing environment, the bank’s non interest income is likely to moderate.

We have arrived at a fair value estimate for the consolidated entity of Rs1,528 using the SOTP methodology. This indicates a potential upside of 6% over the current market price. We therefore downgrade our rating from Buy to HOLD.