We met the management at State Bank of India (SBI) in order to get an understanding of how the domestic banking system in general, and SBI in particular, are adapting to the new monetary policy stance.
The 28% year-on-year growth in net profit during H1FY09 has been primarily driven by growth in other income, partially offset by the disproportionately higher provisioning.
Though NII growth clocked in at a healthy 45% during Q2FY09, going forward, we expect spreads to remain under stress in the near-term.
Though SBI witnessed a robust quarter in terms of its NII growth during Q2FY09 in line with other leading banks within our coverage universe, the bank has been focused on growing its core fee income over the last few quarters.
With core fee income consistently accounting for ~60% of the non-interest income, SBI’s dependence on treasury gains has been fairly modest.
However, with the recent easing in the monetary policy stance and the resultant drop in treasury yields, the yield on the 10-yr benchmark security has moved from 8.45% (as on 1st Oct’08) to 5.11% (as of 05th Jan’09), a sharp appreciation of over 300bps over the quarter.
Consistent with our broader macro-economic view (post- the most recent easing in policy rates), we believe that interest rates are likely to plateau at current levels over the medium-term.
Hence, we believe that bond prices are closer to their peak. Going forward, we expect limited upside potential from treasury gains beyond the current quarter.
We have made upward revisions to our business growth assumptions for FY09E and FY10E.
Having factored in a lower spread during the near-term, we arrive at an SOTP-based target price of Rs1,679 over a 12-month horizon, indicating an upside of 24% from current levels.
At its CMP of Rs1,357, the stock is currently trading at 1.6x and 1.5x our FY09E and FY10E ABVPS estimates. We recommend a BUY on the stock at current levels.