BofA-ML

SBI (Buy)

CMP: ₹2,522.05

Target: ₹3,450

Our 12-month price objective (PO) on SBI is ₹3450 ($115/GDR). We believe a) SBI’s non-performing loan (NPL) cycle may be plateauing and b) The CMD is addressing all issues head on, focusing on quality and profitability versus growth. Valuations at 1.3x FY16 adjustable BV (close to cycle average) pricing in key risks. Plateauing of the NPL cycle along with new strategy could re-rate SBI to 1.8-1.9x adj. BV (one year forward or FY16). We add ₹327 for non-banks subs and ₹248 for associate banks. Alternatively our PO is based on the Gordon model theory, where we assume normalised average (FY15-16) return on equity of 16 per cent and cost of equity of 13.5 per cent and sustainable growth of 8 per cent and assigning 30 per cent+ premium to theoretical multiples owing to large liability franchise and dominant position in the market (+16 per cent market share). Downside risks to our PO are a sharper than estimated rise in NPLs and no policy rate cuts. Upside risks to our PO are recovery in macro and upside to asset quality and growth.

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