Loan growth and asset quality: SBI better get its act together

State Bank of India’s troubles are not over as yet, with Morgan Stanley slashing its target price from Rs 1,550 to Rs 1,350 mainly on three concerns, of which asset quality is a major worry. The fresh slippages had grown rapidly while pace of recoveries were slowing down. This means gross bad loans could now go up rapidly.

[caption id=“attachment_129206” align=“alignleft” width=“380” caption=“Citi has has also cut the target price from Rs 2,500 to Rs 2,250. Reuters”] [/caption]

The net interest margin for the bank was 4.1 percent which is the same as HDFC bank.

Morgan Stanley report points out that a large part of HDFC Bank’s loan book is not supported by mortgage, thus resulting in higher yields.

This means SBI is also running after high margins, which could push some smaller borrowers into the category of bad loans. Thus the research house expects flat earnings for SBI in the next fiscal.

The third issue is that of capital adequacy. As Firstpost had already pointed out, the capital adequacy for Tier 1 capital of the bank came at 7.46 percent, below the 8 percent benchmark recommended by the RBI.

The government is planning to invest Rs 4,000 crore in the bank, which will not be enough for the bank. The stock, Morgan Stanley fears, could trade below its book value (total value of assets) for the year.

Citi has has also cut the target price from Rs 2,500 to Rs 2,250 because of similar concerns. Though SBI’s exposure to power (4 percent of loans) and SEBs (0.2 percent of loans) remain low, its higher mid-corporate/SME exposures could see slippages. They reduced earnings estimates for the next two years on higher credit costs and lower fee income.

Deutsche is more optimistic about the stock with a target price maintained at Rs 2,450. Their reason: SBI has been shedding high cost bulk deposits and certificate of deposits, while current and savings account (CASA) growth has been healthy; this has helped keep the cost of funds in check. They are also relying on management guidance that margins could improve further. But asset quality and loan growth also remain the biggest worries for them.