We recently met the management of State Bank of India (SBI) to take stock of the situation post the recent developments in the industry as well as the bank.
In line with the trend currently seen in the banking industry, the credit growth for SBI too seems to be losing steam.
After a period of high credit growth, the management indicated that there has been some deceleration in the credit off-take in January 2009.
Due to significant liquidity crunch seen during Q3FY2009 and drying up of alternative sources of funds public sector banks witnessed robust credit demand.
However due to rising risk aversion among banks coupled with economic slowdown and repayment of short-term working capital loans extended to corporates during H1FY2009, we may see lower credit growth in the last quarter of the current fiscal.
The ongoing discussion between the Indian Bank’s Association and the staff union regarding pending wage hike issue is near conclusion. SBI has been providing Rs115 crore per quarter on an ad-hoc basis factoring in a 15% wage hike.
The bank may have to provide more towards wage revision if the hike in salaries in excess of 15% is agreed upon.
Besides, the bank had provided Rs750 crore in Q3FY2009 under AS-15 on account of its pension liabilities due to sharp fall in G-Sec yields.
The management is of the view that it may have to make an additional Rs250-300 crore worth of provisions towards its pension liabilities in Q4FY2009. These additional provisions are likely to adversely impact the operating profitability of the bank in Q4FY2009.
SBI’s year-till-date performance has been well above expectations, however the future performance of the bank would be dependent on lot of factors in the light of the slowing economy.
We believe the bank’s asset quality will remain at the center stage in the quarters to come.
Besides, the aggressive growth plans chalked out by the bank under the current operating environment characterised by weakening macro-economic fundamentals could pose a threat to the asset quality going forward.
At the current market price of Rs1,136, the stock trades at 8.1x FY2010E earnings per share (EPS), 3.9x FY2010E pre-provisioning profit , 1.1x FY2010E stand-alone book value (BV) and 0.9x F2010E consolidated BV.
We maintain our BUY recommendation on the stock with a price target of Rs1,516.