I am 40 years old and have never bought or sold shares. I am interested in investing Rs 2 lakh in the shares of State Bank of India (SBI). I would like to hold this stock for two years. Please advise if in the present situation investing in SBI would be wise?-Monimoy
If we talk about State Bank of India’s strengths, it is not only the largest public sector bank (PSB), it was also one of the few PSBs that managed to substantially expand their market share of savings deposit by 270 basis points to 23.2 per cent during FY07-10. This was driven by relatively faster branch expansion at a compounded annual growth rate of 9.5 per cent. Moreover, SBI has a relatively strong share of fee income, owing to its strong corporate and government relationships. In FY11, the bank continued its dominance with non-interest income to assets at 1.3 per cent, the highest among PSU banks.
However, SBI had a very disappointing fourth quarter. It posted a nominal profit of Rs 20 crore, a drastic fall of 98.9 per cent on a year-on-year basis. Profitability was hampered on account of a sharp dip in net interest margin (NIM), higher non-performing asset (NPA) provisions, and rise in effective tax rates. The other key negative was the substantial Rs 7,927 crore pension burden that was adjusted against its net worth, taking tier-I capital adequacy ratio (CAR) below the 8 per cent comfort level.
There was a massive cleanup in the March quarter and market experts believe that in future the burden on the bank due to provisions will be a lot lower. The bank’s slippages are also expected to decline from the current high levels of 2.8 per cent to 2.6 per cent in FY12 and 2.5 per cent in FY13.
However, one cannot ignore that it has one of the highest NPAs among large-sized peers. The deterioration in asset quality seen in Q4 is worrying. The coverage ratio, which increased during the quarter, still needs to increase further.
On the valuations front, the stock is currently trading at a price-to-book value (P/B) ratio of 2.17. This is close to its five-year median P/B of 2.12. The stock seems fairly valued and is expected to outperform on account of its strong core competitiveness, likelihood of credit expansion, and market share gains in current account savings account (CASA). All this makes it a sound long-term bet. So you may accumulate this stock for the long-term on further dips. Hold for at least three years.
This article was originally published on August 04, 2011.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
