Dolat Capital is bearish on State Bank of India (SBI) and has recommended reduce rating on the stock with a target of Rs 2805 in its May 23, 2014 research report.
"SBI delivered better than expected profitability and asset quality performance. Fresh NPL formations reduced QoQ, while the additions to restructured loans increased. The sharp improvement in NPL recoveries and upgrade aided in bringing down the gross NPLs, which declined QoQ both in absolute amounts as well as on percent basis. The bank's fresh NL formations at Rs 79.5bn was noticeably lower QoQ. The slippages were mostly concentrated in the mid corporate segment. NPLs in the large corporate and the SME segments was significantly lower QoQ. Overall delinquency rates (including restructured loans) was lower QoQ at 5 percent and the total stressed asset portfolio also saw an improvement to 8.4 percent v/s 9.1 percent in Q3FY14. The management indicated a pipeline of Rs 37bn for restructuring under CDR. The bank sold loans worth Rs 36bn to asset reconstruction companies. The management has indicated that the banks intends to write-off and sell loans to ARCs on a consistent basis rather than in the last quarter. The asset quality in SME, retail and agriculture segment is under control and the management believes that they have to be watchful on the mid corporate segment. Coverage ratio also saw an improvement QoQ to 63 percent. NIM at 3.17 percent was almost stable QoQ, with domestic NIM at 3.49 percent."
"The bank has shown a sharp improvement in asset quality this quarter, aided by both lower slippages and also improved recoveries and upgradations. We believe that the pace of slippages should trend downwards over the next few quarters, howvere; the pace of decline is unlikely to be as sharp. Also it would be difficult for the bank to match the recoveries performance over the short term (couple of quarters). We remain positive on the stock, we believe the stock can re-rate further if the bank is able to show consistency in NPL recoveries and the pace of slippages reduces meaningfully. However, given the sharp upmoves in the price over the past couple of days, the potential upside has got reduced; hence we have to assign a Reduce rating with SOTP based target price of Rs 2805," says Dolat Capital research report.
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