SBI - SHOULD YOU INVEST IN THIS STOCK?

SBI - SHOULD YOU INVEST IN THIS STOCK?

There are lots of queries about the valuation of SBI – India’s largest bank by any parameter. The ‘SBI group’ which consists of many subsidiaries and joint ventures both from banking and non banking sectors is the largest loan provider for people and business in India.
According to the SBI’s website (which is not updated) the bank has 4713 branches in India, operates 21,000 ATMs and has 180 offices in 34 countries as on June 30^th 2011. Logically, the bank holds high amount of CASA (Current Account Savings Account) deposits which carries lower interest liability. This has helped the bank to give loans at the most competitive rates in India.

Two main drawbacks: With the deregulation of savings bank interest rates by the RBI, the bank will be under pressure to pay better rates of interest to keep its customers happy. Banks like Yes bank are already giving 4% or more for money deposited in savings bank account. To be in the race, SBI will also have to pay high interest for their CASA deposits. In short, from now on, what was considered as the greatest advantage of SBI would turn out to be It’s greatest disadvantage.
The second factor that may work against this huge bank is that the new banking license norms would bring in more players into the banking sector which would initiate cut throat competition in the banking sector (Something similar to the tariff war we saw between telecom companies). How far SBI is prepared to face this remains a big question.
More number of branches also means that there is a huge number of work force to be maintained and of course, high operating expenses. The last few years’ financials also show questionable asset quality.

Two main advantages: first, size. With many subsidiaries and a variety of financial services under its kitty (insurance, mutual funds, merchant banking, credit cards, factoring, stock broking, pension fund management etc) and with spreading business in every nook and corner of India, it would be hard to beat this bank in terms of revenues.
Second – Government of India’s holding of approximately 60% in the bank. SBI always stands in an advantageous position with the government being its main promoter.

Our suggestion: Looking at the financials of the bank for the last 6 years, we estimate the bank’s share value at Rs 2450. So, to buy the stock for long term the stock must be bought only at 30% discount or below. That means, at Rs 1700 and below. At the current market rate (Rs 2205) the stock is in midway between the value zone and over priced zone and hence, we do not suggest exposure in this stock for the long term. The current momentum many take the stock beyond Rs 2450 which means that the stock has the capacity to generate approximately 10% to 15% return.

This is our suggestion. Readers are welcome to share their thoughts for the benefit of others