State Bank of India
Reco Price: Rs 1,813
Current market price: Rs 1,918
Target price: Rs 2,109
Upside: 10%
Brokerage: Daiwa Securities

The broking house believes that one of State Bank of India’s (SBI) biggest advantages is the high interest spread on its bond portfolio. The incremental cost of funds for SBI has fallen by almost 210 bps over the past nine months, whereas the incremental yield on its government-bond portfolio has remained more or less the same. Currently, if SBI buys a 10-year government bond, then it is making an incremental interest spread of 200-250 bps, compared with a negative interest spread six months ago and a positive spread of around 10 bps nine months back.

SBI moved almost Rs 35,000 crore of short-term cash to statutory liquidity ratio (SLR) securities in 1Q FY10, and this is likely to have a positive impact and reflect in the NIM in the latter half of FY10. The re-pricing of high-cost deposits in November-December 2009 would also give the NIM a further boost. SBI has underperformed both the broader and Nifty banking indices over the past six months, but this trend will reverse over the next six months. The six-month target price is revised to Rs 2,109 from Rs 1,043, based on a target PBR of 1.5x on FY10 consolidated BVPS forecast and adding Rs160 per share for the life-insurance venture.

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