Fresh investments with a three-year horizon can be considered in the stock of State Bank of India. The bank's March quarter financial results allayed concerns of rising bad loans. Not only did it manage to curtail the rising trend in non-performing assets (NPAs) but also recovered a record amount of loans. This could lift the loan book quality, going forward. The return on assets ratio of the bank improved from 0.87 per cent in FY10 to 0.92 per cent in FY12 and offers further scope for improvement as provisions moderate. The bank chose to improve its profitability at the cost of market share. At the current price of Rs 1,942, the stock discounts its estimated FY13 consolidated book value (adjusted for NPAs) by 1.27 times. The price-to-earnings multiple works out to a modest 7.1 per cent even as the growth opportunities continue to be promising. On a relative basis, the valuation continues to be at a premium to other public sector banks. However, the bank has fully provided for the pension liability and has lower proportion of restructured loans.

High proportion of savings bank accounts (36 per cent of the total deposits) and lower dependence on bulk deposits enabled SBI have best-in the-industry net interest margin. Teaser rate loans re-priced at higher rates and rising credit-deposit ratio also boosted the margins. The net interest margin improved from 3.07 per cent in March 2011 to 3.89 per cent in March 2012.

It is noteworthy that the bank has not taken big risks to improve its margins. Domestic yields on loans are at 11.05 per cent — closer to base rates of other banks. The tier-1 capital ratio as of March 2012 was 9.8 per cent. This will allow SBI maintain adequate capital until the prospects improve for raising capital from the market.

The net NPA ratio of the bank has only gone up by 21 basis points to 1.82 per cent even as the gross NPAs went up by 92 basis points during the one-year ended March 2012. There were encouraging signs this quarter with bank recovering/upgrading around Rs 4,700 crore from NPAs. The restructured assets which are standard assets account for only 3.5 per cent of the advances.

Outlook

The cut in the cash reserve ratio and the capital infusion by the government provide sufficient liquidity to scout for near-term opportunities even as other banks are struggling to garner deposits. High liquidity will allow SBI maintain its margins. Secondly, the bank may also benefit if the provisions do not grow as much as they have this year. Improved recovery of loans will be the icing on the cake. However, any slowdown in economy will put further pressure on the asset quality.

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