After spectacular results, is it time to upgrade SBI?

State Bank of India’s shares,which have lost 17 percent in the last six months, has gained 9 percent in the past week on the back of better-than-expected results.

Last year, when Pratip Chaudhury took over the role of chairman and managing director of India’s largest bank, he had his job cut out. In an effort to clean up the bank’s books, he increased bad debt provisions and wrote off a large chunk of bad loans. So much so that in the fourth quarter of 2010-2011, the bank reported a profit of just Rs 22 crore.

This year, however, Chadhury was feeling more triumphant. “We waged a war against non-performing assets (NPAs) and we seem to be winning this war,” he declared after announcing the March-ending quarter’s results.

Some brokerages like CLSA agree. After its stellar fourth-quarter results, the brokerage has upgraded SBI to a ‘buy’ with a target price of Rs 2,350. The stock’s current price is Rs 2,004. The report says that over the past few years, the biggest concern has been the concern on asset quality because of the bank’s aggressive growth. Over 2009-12, gross NPAs had grown grown to 36 percent.

But three corrective measures taken by SBI have convinced CLSA to view the stock favourably:slower growth, emphasis on recoveries and an improvement in quality of supervision. “SBI’s future asset quality trend will be better than other PSUs as it has been ahead in taking corrective actions,” it says in a report.

Even Bank of America Merrill Lynch has upgraded SBI to a ‘buy’ from ’neutral’ with a price target of Rs 2,425. It believes the stock has become attractive after a 22 percent fall in the price over the past two months and raised the earnings per share estimate by 5 percent for the financial year ending March 2013. It is also comfortable with the bank’s capital adequacy ratio for Tier I capital of 9.8 percent.

Credit Suisse, however, while applauding SBI’s focus on improving asset quality and lowering slippages (the proportion of loans turning bad), maintains its ’neutral’ rating of the stock.

It says that while the bad debts provisions coverage has improved from 63 percent to 68 percent, it is still lower than peers. Moreover, there is more visible stress from mid-corporate levels, small- and medium- enterprises, agriculture and quasi-government segments like state electricity boards.

Credit Suisse also warned that employee expenses will remain one of the key risks for SBI. The period for which previous wage negotiations is applicable will also expire in November this year, and the upside risk to wage costs remains. All things considered, the brokerage believes that SBI’s stock valuations are in line with peers and do not require a re-rating.

The most skeptical of all is HSBC, which maintains its ‘underweight’ rating on the stock with a target price of Rs 2,000. It notes that the good fourth-quarter numbers are better than expected because of higher other income and lower credit costs.“One quarter of good performance has not changed our outlook much, especiallygiven the tough macro environment, tight liquidity, currency depreciation and high interest rates, which impacts corporates,” it said in a research note.

With such mixed messages coming from foreign brokerages, investors will have a tough time deciding what to do with the stock.

Investors might face some sleepless nights deciding what to do next, but Chaudhury, at least for now, certainly seems more confident about the future.