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Equity Bottom-Up

State Bank of India's second quarter was fairly subdued and the result does not change our long-term view on the bank. Net interest income was flat as a slight uptick of 1.2% in loan growth was offset by compressing margins, while asset quality also slipped. The share price has further strengthened since the first quarter and trading at a slight discount to our unchanged fair value of INR 280, we require a larger margin of safety before recommending the stock.Deposit growth was strong at 4.3% and we expect the pace of growth to sustain in the medium term. The Government of India announced last Tuesday the current 500 rupee and 1,000 rupee notes, which make up a large amount of cash in circulation, will cease to be legal tender and will be replaced with a new 500 rupee and 2000 rupee denominated notes. A new 1,000 rupee notes will also be introduced at a later date. The move was undertaken by the government to crackdown on black market activities, corruption and illegal cash holdings. In our view, the move should increase accountability for the government and the amount of taxable income. While the reduced economic activity is a temporary negative, we believe this is a longer-term positive for the economy as a shift away from black market activities should push money into the banking system. In the three days to the result announcement, management noted INR 335 billion were deposited into the bank. Specifically, INR 110 billion was deposited on Thursday, compared with an average monthly increase of INR 80 billion. This reflects the strength of the bank's wide retail presence, underpinning its large deposit base in India and competitive advantage in low cost funding with rupees. While return on equity will continue to be weighed down by rising provisioning on rising nonperforming assets, we forecast the bank to generate return above its cost of equity at the end of our explicit forecast period. Analyst: Michael Wu, CAIA

State Bank of India's second quarter was fairly subdued and the result does not change our long-term view on the bank. Net interest income was flat as a slight uptick of 1.2% in loan growth was offset by compressing margins, while asset quality also slipped. The share price has further strengthened since the first quarter and trading at a slight discount to our unchanged fair value of INR 280, we require a larger margin of safety before recommending the stock.Deposit growth was strong at 4.3% and we expect the pace of growth to sustain in the medium term. The Government of India announced last Tuesday the current 500 rupee and 1,000 rupee notes, which make up a large amount of cash in circulation, will cease to be legal tender and will be replaced with a new 500 rupee and 2000 rupee denominated notes. A new 1,000 rupee notes will also be introduced at a later date. The move was undertaken by the government to crackdown on black market activities, corruption and illegal cash holdings. In our view, the move should increase accountability for the government and the amount of taxable income. While the reduced economic activity is a temporary negative, we believe this is a longer-term positive for the economy as a shift away from black market activities should push money into the banking system. In the three days to the result announcement, management noted INR 335 billion were deposited into the bank. Specifically, INR 110 billion was deposited on Thursday, compared with an average monthly increase of INR 80 billion. This reflects the strength of the bank's wide retail presence, underpinning its large deposit base in India and competitive advantage in low cost funding with rupees. While return on equity will continue to be weighed down by rising provisioning on rising nonperforming assets, we forecast the bank to generate return above its cost of equity at the end of our explicit forecast period. Analyst: Michael Wu, CAIA

State Bank of India Reports Subdued Second-Quarter Result; Demonetisation Pushing Deposit Inflow

State Bank Of India

State Bank of India Reports Subdued Second-Quarter Result; Demonetisation Pushing Deposit Inflow