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Growth, rather than asset quality biggest challenge for SBI: Siddharth Purohit, SMC Global Securities

In the next two quarters, the provisioning will be higher for SBI.

ET Now|
Dec 11, 2019, 03.18 PM IST
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One thing that is playing in favour of the bank is that the valuations and upcoming expected IPO by the subsidiary is at a much higher valuation than the initial expectations, says Siddharth Purohit, Equity research analyst, SMC Global Securities. Excerpts from an interview with ETNOW.

Would you be more on the bull case or the bear cycle when it comes to SBI?
We have a particularly neutral view on the stock, let me tell you why. There are positives and negatives that we have discussed. In the last couple of quarters, we have seen that asset quality has receded which has affected incremental asset formation. But in the last quarter, slippages numbers were not alarming. These had come down substantially. So, on asset quality front, it is quite comfortable.

But when you look at some of the bigger stressed sectors like steel, telecom or textile, others are adequately provided for. So that is not a concern. But what has happened is that probably new sectors and new emerging areas are coming under stress and that could pose a threat for incremental improvement in asset quality.

At 63% calculated PCR, these are adequately provided for but if big accounts come as a negative surprise as NPA going ahead, then probably the bank will have to take additional provisions.

SBI management gave 1.8% credit cost guidance for the full year. That seems to be a challenging task. I acknowledge that they will have a substantial recovery from Essar account, but one cannot ignore the fact that there is a sizable exposure to accounts like DHFL also, where we are not adequately provided for.

So, the last portion of that recovery could eat into the incremental slippages. I believe that credit cost guidance of 1.8% may not be enough and that would be marginally negative. When you look at the growth per se, the management has given a guidance of around 10% growth. This 10% does not look very big, but given the size of the balance sheet of almost Rs 20 lakh crore, the 10% growth indicates incremental disbursement of Rs 2 lakh crore every year, which is very challenging given the current environment.

I consider growth as the biggest challenge rather than asset quality at this juncture. That is why I have a neutral view despite the consistent improvement in asset quality. But one thing that is playing in favour of the bank is that the valuations and upcoming expected IPO by the subsidiary is at a much higher valuation than the initial expectations.

Net-net, the stock has not really delivered very strong returns as compared to other corporate lenders and private lenders. That is why our preference has been towards the private players even at this juncture, despite the run up we have seen in large private banks.

RBI had flagged off a divergence in SBI balance sheet. Although the management has given us their stance saying that they will be addressing all of these recognition issues in the next quarter, this has come as quite a negative surprise for the bank. Do you think there is more pain in store for SBI?
Divergence was not really expected even though they have clarified that in subsequent quarters, those accounts have been classified as NPAs and upgraded also partially. But the amount is yet to be provided. The credit cost guidance will probably exceed the guidance that they have given. In addition to that, coming back to the Dewan account and the NCLT cases, earlier we have seen very good recovery and in the manufacturing side also we might see good recovery, but this is the first time that a financial company got into insolvency court. There is no track record of recovery rate from financial companies. My view is that the haircut in those cases would be higher.

I believe that in the next two quarters, the provisioning will be higher. While one can acknowledge that FY21 will be very good for the bank, FY20 or the coming two quarters are going to be challenging. That is why in the recent run-up, a lot of positivity is already priced in and one should take a neutral call on the stock.

In the meantime, private banks may catch up faster in terms of business growth as well as rerating. I feel there are still some hangover on the asset quality side, but I am more concerned about growth, given the state of the economy.

What is the target price on the stock and what would be the top three factors that would be major positives or a game changer for SBI?
The stock is adequately priced right now. I do not see any upside in the near term at least and that is why I think probably there has been a major runup in the stock post Q2 results. After that some clarification with regards to big accounts like Essar Steel and possibly the IPO of the subsidiary is supporting to some extent.

I do not see much upside in the near term and that is why I have a neutral view on the stock. I do not see the stock going up from here onwards in the near term.

As for a trigger, if growth in terms of credit disbursal picks up, that could probably add up and proceed in terms of insolvency in the DHFL cases and some more accounts in the NCLT cases could be the triggers for the stock. Of course, the final pricing of the subsidiary could be the trigger. But net-net, the stock may not outperform in the near term.

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