SBI stock to feel the pinch of tepid QIP

Higher overheads and rising NPAs could keep net profit growth muted in the December quarter as well

Following the lukewarm response to State Bank of India’s share sale, the stock is expected to remain under pressure in the coming months, even as it grapples issues such as non-performing assets (NPAs) and higher provisioning. SBI has underperformed the Nifty, the National Stock Exchange’s benchmark in the past year.

Analysts say this could continue in the medium term, as credit costs are expected to remain high. Over the longer term, due to the price correction, the stock would get closer to fair pricing.

In the recently concluded qualified institutional placement, SBI raised Rs 8,032 crore, a bit short of the initial targeted amount of Rs 9,300 crore. SBI issued 51 million shares at a final price of Rs 1,565 crore. Last month, the central government infused Rs 2,000 crore at Rs 1,782.74 a share. After the QIP, the government stake is 58.6 per cent. The QIP and preferential allotment combine to make Rs 10,032 crore, taking the capital adequacy ratio to 12.81 per cent from 11.92 per cent in September 2013.

Analysts say this could see SBI through for the next 18-24 months in credit growth. In the second quarter of FY14, advances rose 19 per cent, with strong growth in large and mid-size corporate loans and growth in the retail segment. Says Dinesh Shukla, banking analyst, Sharekhan: “In this environment, 14-16 per cent credit growth is good, given that the industry environment is sluggish. We expect it to continue.”

One of the key concerns for the stock's performance in recent times has been the rising trend of NPAs. Analysts are worried that these quality concerns will persist. Restructuring worth Rs 5,000 crore is expected this quarter. SBI's gross NPAs had risen to 5.6 per cent of the total in the second quarter; some feel it could rise further, to close to six per cent.

Net interest margins were stable at 3.2 per cent in the second quarter and analysts expect it to remain positive. SBI raised its base rates by 30 basis points in the last quarter and it also has a relatively strong current and savings account deposit base, of 43.6 per cent of the total.

However, costs have been rising and it is expected to make higher provisioning towards employee expenses and higher overheads. The hardening yields in the domestic and international market is also likely to see higher provisions on its treasury portfolio. So, net profit growth will remain subdued in the coming quarter.

Analysts expect net profits at about Rs 3,000 crore, a growth of 11 per cent over last year. The Street expects in the absence of any major trigger in the next few months, an earnings revision is unlikely, which could keep pressure in the short run on the stock.

The stock fell 3.6 per cent to Rs 1,517; the S&P CNX Nifty dipped 0.8 per cent to 6,073 points.

Says Saday Sinha, banking analyst, Kotak Securities: “Public sector banks have been facing an asset quality issue and we have been cautious on these banks for some time.” The stock might remain weak for now but analysts say in the long run, it is expected to do well, as the recent price correction has bought down valuations.

As for the share sale, Life Insurance Corporation is said to have bid for close to Rs 3,500 crore of equity. This is expected to take its holding in SBI close to 15 per cent. With analysts expecting the stock to remain subdued in the next few quarters, LIC could see some short-term pressure on its holdings. However, fundamentally, LIC might have made a good investment, say analysts.