Stock Review: SBI

THE markets are driven by different things at different points. At this point of time, 'attractive' valuations are a big draw. Since the financial meltdown spooked world markets in late 2009, several large-cap stocks are trading close to their lows. This is the case for State Bank of India, too. After the bank posted a 96 per cent drop in profits in May, the stock is down nearly 18 per cent.

Despite the drop in profits, analysts have not downgraded earnings for FY12 just yet. From that point of view, the fall in stock price may be viewed as an opportunity. But, investors need to watch out for the first quarter profits. Anything lower than `1,500-2,000 crore in the first quarter could trigger earnings downgrades. Analysts expect full year profit to be in the range of `12,500-13,500 crore, which means the run rate should be `3,500 crore in the second, third and fourth quarters.

Analysis of the annual report shows slippages are higher at 2.8 per cent in FY11, mainly led by delinquencies in agriculture (5.1 per cent), small and medium businesses (4 per cent) and `854 crore added by the State Bank of Indore merger.

The enhanced provisioning requirement will need additional provisioning of `1,600 crore, against which it is carrying excess provisioning of `500 crore. Given that the total provisioning cost is expected to be 2,000 crore in the first quarter, profits will remain under pressure.

The outlook isn't very rosy from the margins point of view either. While the management has been optimistic about improving net interest margins from 3.32 per cent to 3.5 per cent, this may not happen due to rise in the savings rate and slowing growth. Given that it's India's largest bank, analysts are not losing sleep over a slight deceleration in growth, but they are concerned about rising slippages and net interest margins. As of now, no serious shift in foreign or domestic institutional ownership has happened. Despite this, the street remains cautious for now.