State Bank of India was backed by a broad section of the market on Wednesday, including funds, as part of the general uptrend in banking sector stocks.

By 12:30 IST, the scrip of India's largest bank by assets and income climbed 3.09% to Rs 301.70. Volumes in State Bank of India were substantial at around 8.5 lakh shares on BSE.

With bank stocks getting re-rated in the broad market over the last few sessions, SBI seems to be in focus now, not having received the same esteem in the earlier part of the rally. In the one month between 11 April and 13 May 2003, PSU banks (excluding SBI), on an average, rose 18.3%, while SBI just gained 1.7%

Despite huge profits, SBI only enjoys a P/E of 5 times, close to other PSU banks that have lower profits than SBI. Analysts feel that SBI's gain will set in further gains for other banking PSU stocks as a higher discounting for SBI would mean that other banking PSU stocks could enjoy a higher valuation.

The state-run bank is also expected to come out with impressive Q4 and FY 2002-03 results. Analysts expect the bank to record a growth in net profit of 13-23.5% to Rs 695-740 crore (Rs 6.95-7.4 billion) for the quarter ended 31 March 2003.

Earlier, there were reports that the bank could get a voluminous Rs 700 crore (Rs 7 billion) from the sale of assets– especially shares of several blue chip companies -seized from Harshad Mehta and a couple of other stock brokers following the 1992 securities scam. The amount received would directly boost net profit of the bank.

The sale of the securities and other assets of the brokers who were involved in the 1992 scam are attached by the Special Court and handled by the Office of the Custodian appointed by the court. The court was set up to dispose of the cases relating to the scam and help banks realise their outstanding dues aggregating to over Rs 3,000 crore (Rs 30 billion) from the tainted brokers.

Reports surfaced last month that SBI had already recovered a sum of Rs 124.80 crore (Rs 1.24 billion) during 2002-03 through legal cases filed for recovery in securities transactions pertaining to the year 1991-92. These recoveries will be accounted for at the time of finalisation of accounts for the year 2002-03.

Meanwhile, much is expected from the government in terms of amendment to the SBI Act, that will enable the transfer of RBI's entire holding in SBI to the Centre and increase SBI's capital base for carrying out expansions.

RBI is already believed to have sent a proposal to the government for bringing down its holding in SBI. RBI holds 59.7% stake in SBI.

The proposed bill to amend the SBI Act of 1955 is likely to be ready before the monsoon session of Parliament. The amendments in the SBI Act have been proposed to enable SBI to increase its authorised capital and bring the voting rights of shareholders in conformity to the provisions of Banking Regulations Act. The amendment may also hinge on rationalising the powers of the board, permitting the acquisition of the business of other banks and other matters relating to shares, in line with the Companies Act.

Interest in the SBI scrip has also been generated over hope that the Centre may hike the cap on foreign institutional investors' holding in the bank from 20% to 49% or that the government will exclude the Global Depository Receipts holding of 7.65% from the ceiling of 20% for FIIs (in SBI). Currently, the limit for FIIs in SBI stands exhausted as they hold a 19.63% stake (as per the shareholding pattern of the bank on 31 December 2002).

In a direct bearing on the prospects of the bank, the Securitisation Act has vindicated the bank's recovery mechanism as it allows lenders to attach assets of defaulting borrowers without having to go to court for the purpose. The Act paves the way for the setting up of asset reconstruction companies to recover non-performing assets. SBI has already spruced up its act in respect of recovery of bad loans and has moved to seize the assets of defaulting borrowers.

For Q3 ended 31 December 2002, SBI recorded a 28% growth in net profit to Rs 787.05 crore (Rs 7.87 billion). Net revenues jumped by 18% to Rs 3,756.93 crore (Rs 37.56 billion).

BSE code: 500112