Rate rise, low slippages positives for SBI

While net interest margins could moderate going ahead, healthy core operating performance and reasonable valuations make the scrip attractive.

The country’s largest lender, State Bank of India (SBI) last week raised its base rate by 40 basis points (bps) to 8 per cent led by a sharp surge in banks’ cost of funds. Analysts believe the rise in lending rates was expected and would enable the bank to protect its margins by passing on the rising cost of funds.

While the September quarter margins appear to be at their peak, a decline from these levels will be gradual and minimal. Brokerages expect a 5-10 per cent decline in net interest margins for banks over the September quarter levels for 2010-11. Higher provisions for bad debt as well as for pension liabilities could put pressure on earnings in the near term.

However, analysts are positive on the stock due to a healthy core operating performance driven by a strong current account savings account mix, reducing excess balance sheet liquidity and likely lower losses from a restructured book. Brokerages expect a 18-20 per cent upside from the current levels.

Pricing power
Owing to the slowing deposits growth, SBI has also raised its deposit rate by 50 basis points (bps) to 9 per cent on 1,000-day and 555-day deposits. These hikes coupled with the 25 bps rise in the benchmark prime lending rate (BPLR) to 12.75 per cent reflect the pricing power wielded by banks and will help steady their margins. For 2010-11, the banking system has seen a cumulative rise of 190 bps in deposit rates, 120 bps in BPLR and 75 bps in the base rate. Sharp rises in the deposit rates have triggered this rate rise.

Easing liquidity
The banking system has experienced marginal relief from extreme conditions as reflected in the net repo outstanding coming to a negative of Rs 1.1 trillion from a high of Rs 1.6 trillion. Recent RBI measures to boost liquidity, like open market operations of Rs 48,000 crore over the next month and statutory liquidity ratio (SLR) cut from 25 per cent to 24 per cent, will address the persistent shortfall in domestic liquidity. Experts believe liquidity will remain tight (in the Rs 800-1,100 billion range) till the second week of February. After that, liquidity conditions are expected to improve.

Teaser loans: Short-term impact
Though the extension of teaser loans will have a near-term impact (due to the higher provisioning of 2 per cent versus 0.40 per cent earlier) on profitability, it will be beneficial in the long run as the bank acquires more customers. Analysts believe SBI may have to provide Rs 350 crore for teaser loans this financial year. This could lead to some moderation in the sharp rise witnessed in the net interest income. Further, analysts believe the bank needs to accelerate the pace of deposits to support loan growth. Key concerns on SBI include higher non-performing assets and losses on treasury.

Fund-raising plans
After its maiden public issue of bonds two months ago (Rs 500 crore), SBI now aims to raise Rs 10,000 crore through a public issue of subordinated bonds (lower tier-II bonds) to fund its business growth. Surging interest rates, slowing deposit accretion and the size of the issue could result in this issue being priced at about the same interest rate that it offered on its maiden retail bonds issue (9.25 per cent on 10-year maturity bonds and 9.50 per cent on 15-year maturity bonds).