State Bank of India (SBI) reported a disturbing set of core operational numbers for Q4FY09, with a flat performance on the NII front; the bank’s NII grew by a dismal 1% y-o-y to Rs48.42 billion as against Rs48 billion during the corresponding period last year.
A disproportionate rise in non-interest income, driven by a 34% rise in core fee income and a four-fold increase in treasury profits, boosted the bank’s bottomline that clocked in at Rs27.4 billion, an increase of 46% over Rs18.8 billion during Q4FY08.
In view of the lower core spreads that SBI is likely to enjoy over the near-term, we have reduced our SOTP-based target price on the stock from Rs1,675 to Rs1,520.
At its CMP of Rs1,261, the stock trades at 1.4x our FY10E ABVPS. From a valuation perspective, we maintain our BUY recommendation on the stock at current levels.
We believe that in order to signal a revival in margins, going forward, SBI would need to either ease its deposit rates considerably (to slow down the pace of deposit accretion) and / or settle for a lower trajectory of high-yielding loan book growth. Until then, we expect the stock to underperform its peerset.
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