Why We Are Not Sweating over SBI's Recent Results.

May 24, 2018

Girish Shetty, Research analyst

Last week, I managed to watch Avengers. I must admit I have hardly followed any of the franchise's previous movies.

But then almost every second person that I know was talking about it. Naturally, I wanted to check what the hype was all about.

If you're like me, then I'll give you a heads up about the movie. It's basically where a bunch of superheroes get together to stop Thanos, the main villain from destroying the world.

I watched it and I must say I was thoroughly impressed. Everything from the pace, theme and special effects got me. I felt it was my money's worth.

One noticeable thing was, despite a whole bunch of superheroes, they couldn't defeat the villain. You had superheroes with every kind of superpower imaginable. But still, they weren't able to overcome the villain.

This got me thinking. Were there too many superheroes in the movie? Would they have been better off with a few superheroes that could've planned better and taken down Thanos?

Isn't that the same case with some of our listed companies? Sometimes, there are too many cooks that spoil the broth.

Take the case of SBI. We had recommended the stock for our StockSelect service in September 2015. The stock was like a superhero in itself.

It was the largest player across loan categories in the country. Back then, it commanded a market share of 16% in the overall advances and was the largest provider of export credit.

But then it tried to get in more superheroes to make it stronger. The five associate banks namely State Bank of Hyderabad, State Bank of Mysore, State Bank of Bikaner and Jaipur, State Bank of Travancore and State Bank of Patiala as well as Bhartiya Mahila Bank were merged with SBI on 1st April 2017.

This merger was supposed to help the bank. But we felt differently. We expected these to be a hindrance rather than a growth driver for the company at least in the short term till everything is streamlined.

Why? SBI's bad loans were constantly increasing. On top of that, SBI's associate banks were doing worse. What we saw was a lot of value erosion in the overall book of SBI in the coming year.

We always prefer to err on the side of caution rather than hope. As a result, we closed our position in SBI in April 2017 with 24% overall gains and a compounded annual return of 16%.

The next one year was a turbulent ride for the stock. The government's Rs 2.11 trillion public sector bank (PSB) capitalization plan was a shot in the arm for the Public sector banks (PSBs). Stocks went up from 30% to 49% in a day. We might have looked foolish then. But not for long.

The Bad loans issue kept escalating. It all came to a boil in the recent quarter. SBI reported a loss of Rs 77 billion in the fourth quarter of FY18. Historically, this was the second largest loss in a quarter reported by a bank. As on 22 May 2017, the stock is down 17% since we closed our position in April.

The Avengers of SBI failed to defeat its Thanos (read: bad loans) in this case.

This further re-affirms our cautious stance both, when buying and selling a stock. On the way, we might miss some opportunities.

But we'll at least make sure, we escape from Thanos' wrath and live to fight another day.

Chart of the Day

Public Sector Banks (PSBs) have had a difficult year, to put it mildly. After the euphoria of recapitalization, bad loans have come to haunt them. Post the Gitanjali Gems fiasco, PSBs are yet to fully recover from its impact.

Public Sector Banks' keep struggling despite Government push

This underperformance was despite the huge boost it got from the government last year. On 24th October, the government announced its Rs 2.11 trillion public sector bank (PSB) capitalization plan. This move was aimed at reviving the PSBs' from the bad loan mess.

The next day was a field day for investors in PSBs. Stocks of PSBs went up from 30% to 47% in a day. Despite this, the overall return in the year was way below average. Stocks of PSBs like Punjab National Bank (PNB) have corrected by more than 45% over the year.

Have we reached the bottom though? Or there are more Nirav Modi stories waiting to come out? Rather than bottom fishing, one should look at banks run by strong management and a differentiated lending strategy available at reasonable valuations.

Regards,
Girish Shetty
Girish Shetty
Research Analyst, StockSelect

PS: Tanushree Banerjee's premium safe stock recommendation service, StockSelect, which has a success rate of 74% over the last 15 years, is now available with a special offer. If you act now, you can get 12 additional months of StockSelect virtually free! This offer is available for the next 3 days only. It ends at midnight, 25th May. So, don't miss out. Click here to get StockSelect right away.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...
China Had Its Brawn. It's Time for India's Brain March 23, 2020
The post coronavirus economic boom won't be led by China.

Equitymaster requests your view! Post a comment on "Why We Are Not Sweating over SBI's Recent Results.". Click here!