Religare Research has upgraded State Bank Of India to 'Buy' with a price target of Rs 2540 in its report dated Dec. 02, 2012.

The State Bank Of India (Q,N,C,F)* reported a weak 2Q. Religare sees asset quality pressures abating at the margin. NIMs could see only limited compression and may pick up with loan growth revival.

It does not expect a sharp decline in SBIN's slippages, and believes stress is at near-peak levels, especially in the mid-corporate segment.

Also, SBIN's restructuring has been lower than other PSBs and largely restricted to CDRs. PCR at 63% remains a concern but should improve as core profitability sustains and asset quality improves. 

SBIN's slippages have remained high in the last few quarters as slowdown in economic growth and adverse regulatory actions in some industries have impacted asset quality, particularly in the mid-corporate and SME segments.

GNPLs in the mid-corporate, SME and Agri segments have increased to 10%, 10% and 8% respectively. Restructuring in the mid-corporate segment is also high at 14% of the total book. 

''We do not expect slippages to decline significantly in the near term as economic slowdown would still hurt the mid-corporate and SME segments, we believe asset quality pressures would decline at the margin,'' it added.

It believes PSBs would need to raise capital to meet the higher tier I requirement. Its calculations indicate that SBIN may need fresh capital of Rs 315 billion if risk weighted assets grow by 15% CAGR (assuming PAT growth of 15% CAGR and payout ratio of 20%). Capital requirement would increase to Rs 500 billion if growth increases to 18%.

While this would lead to lower ROEs (100bps-150bps compression appears likely), it believes lower leverage would also provide more comfort. Sustainable ROEs would remain at 15%+ even at a higher core tier I ratio of 9%. ROE compression could be even lower if the amount of IPDI and PNCPs are higher or capital costs are lower. 

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