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Saturday, September 20, 2008

STOCK UPDATE - State Bank of India (SBI)

State Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,801
Current market price: Rs1,565

Bank on it

Key points
*
With the bond yields cooling off, the banking sector (especially the public sector banks [PSBs]) is likely to benefit in the form of write-back of the mark-to-market (MTM) provisions made earlier.
*
In our PSB universe we prefer State Bank of India (SBI) as it holds significant bond portfolio and is likely to be a major beneficiary of declining bond yields. Besides, SBI should be a good play on the proposed hike in the foreign direct investment (FDI) limit for the insurance sector. Further, the government intends to accelerate the process of merging the associate banks with SBI and hence will be presenting the SBI Subsidiary Bank Amendment Bill 2008 before the Parliament in the forthcoming session. Also, SBI is unlikely to be affected by the implementation of the proposal to offer a second option to the bank employees to join the pension scheme.
*
Though the above factors provide significant comfort, we remain concerned about the potential uptick in the delinquencies (especially agricultural non-performing loans), the lower provisioning coverage and the pressure on the margins of the bank. *At the current market price of Rs1,565, the stock trades at 7.0x FY2009E pre-provisioning profit (PPP) and 1.8x FY2009E book value, making it an attractive Buy considering the multiple triggers in the near term.
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