SBI shares have fallen nearly 9 per cent over the last two sessions, though they saw some buying interest today.
Here are the reasons why analysts want investors to stay away from the stock:
1) Rising bad loans: The state-owned bank, which is exposed to embattled Kingfisher Airlines and Air India, said new bad loans hit Rs 10,840 crore at end-June. Net bad loans rose to 2.2 per cent of the loan book compared to 1.6 per cent a year ago. Gross non-performing assets, as a ratio to the total loan book, rose to 4.99 per cent from 4.44 per cent sequentially.
Deutsche Bank, which downgraded SBI to "hold" from "buy", called the April-June "one of its worst quarters in terms of asset quality."
2) Lower provisioning: Net profit for the fiscal first quarter more than doubled to Rs 3,752 crore compared with Rs 1,584 crore a year earlier. That's because the management preferred showing higher profits over provisions. Provisions, or the funds set aside for bad loans and contingencies, were down 41 per cent year-on-year.
"Drop in provisioning coverage ratio is a bit disappointing despite the bank reporting 13 per cent year-on-year growth in pre-provisioning operating profit for the quarter," Kotak Securities said in a report.
3) Profitability hit: The net interest margin, a key gauge of profitability, fell to 3.57 per cent in the quarter from 3.62 per cent a year ago. On a sequential basis, NIMs declined 32 basis points. The bank expects to achieve its forecast of 3.75 per cent margins for this fiscal year ending in March 2013.
"The drop in net interest margins may leave India's biggest lender with not much cushion to provision for weak asset quality," Deutsche Bank said today.
4) Trust deficit: Bad loans in the June quarter were nearly double against a guidance of Rs 5,500 crore. Chairman Pratip Chaudhuri said the bank expected bad loans to fall to Rs 3,000 crore in the July to September quarter. It is difficult to believe on the guidance considering the large miss in the June quarter.
5) Roadblocks to growth ahead: Banks are a barometer of the economy. The uncertain monsoon and slowdown in economic growth will be a key challenge for SBI ahead.
A string of earnings downgrade also affected sentiments in the counter. HSBC retained its underweight call on the stock, but cut the target of Rs 1,700. Expect weakening margins and continuing asset quality stress, HSBC said.
Goldman Sachs retained neutral, but cut target price to Rs 1,910. Expect flat net interest margins for FY13 against guidance of 3.75 per cent, it said. Morgan Stanley also retained underweight on the stock, but cut its target price to Rs 1,390 citing material deterioration in profitability and elevated NPAs ahead.
(With inputs from Thomson Reuters)