SBI posts record profit for the 4th straight quarter in Q1 but margins a miss: What should you do?

India's largest lender State Bank of India (SBI) beat expectations to post almost a three-fold jump in its net profit for the quarter ended June 2023. This was the bank's highest-ever net profit for the fourth consecutive quarter. However, margins were a bit disappointing in the quarter under review, which led the stock to fall almost 2 percent in intraday deals to ₹569.30.

SBI's Q1 net profit jumped as much as 178.25 percent YoY to ₹16,884 crore driven by robust net interest income and strong loan growth. Its net interest income (NII) for the quarter under review also rose 24.71 percent YoY to ₹38,905 crore while its domestic net interest margin (NIM) came in at 3.47 percent, up 24 bps YoY but fell on a sequential basis.

The lender's asset quality also improved with its gross NPA down to 2.76 percent vs 2.78 percent in the previous quarter and 3.9 percent in the year-ago period. The net NPA also fell to 0.71 percent from 1 percent last year.

The return on assets (RoA) for the lender, however, fell 1 bps QoQ to 1.22 percent and its debt-to-equity ratio also declined to 0.64 vs 0.66 in the previous quarter.

Brokerage Views

Most brokerages remain optimistic about the long-term prospects of the lender and reiterated their ‘buy’ calls on the stock with target prices in the range of ₹700-770 per share, indicating an upside of up to 34 percent.

Prabhudas Lilladher: The brokerage has a ‘buy’ call on the stock with a target price of ₹770, indicating an upside of over 34 percent from its current market price of ₹573.

“SBI saw a stable quarter; while core PAT missed estimates due to lower loan growth, NIM was largely in-line, and asset quality was steady. Bank sounded confident of achieving a 15 percent growth in FY24E given (1) excess SLR of ₹4 lakh crore and (2) current capital can support growth of ₹7 lakh crore. We are factoring in a 13 percent CAGR in loans over FY23-25E as sustained corporate growth is imperative to achieve 15 percent overall growth. Reported domestic NIM came in at 3.47 percent and the bank would like to maintain this level of NIM for FY24E. However, we are factoring a 5 bps decline in overall FY24 NIM to 2.94 percent and NIM upgrade would hinge on MCLR book repricing and better loan growth. As SBI is focused on physical and digital expansion, we raise opex by an average of 3.7 percent for FY24/25E which would be offset by a reduction in provisions by an average of 33 bps,” said PL.

HDFC Securities: The brokerage has a ‘buy’ call on the stock with a target price of ₹750, indicating an upside of 31 percent.

“SBI posted a mixed bag of results with the highest-ever quarterly earnings again, led by lower opex and credit costs. However, loan growth moderated in addition to a 37 bps QoQ decline in domestic NIMs and lower other income. We tweaked its estimates for a lower credit cost, partly offset by softer other income and to watch out for sustainability of cost-to-income trajectory,” it said.

LKP Securities: The brokerage has reiterated its ‘buy’ call on the stock with a target price of ₹743, which implies a 30 percent upside.

“State Bank of India has delivered a stable result on the operating and assets quality front. It’s reported GNPA and NNPA hold steady with stable PCR of 92 percent. The bank has witnessed better-than-expected advance growth led by growth across segments and a steady deposit base sequentially with a better liquidity position. Moreover, the bank has reported the highest-ever quarterly PAT on the back of stable NII and lower loan provisions. The Q1FY24 calculated ROA and ROE stood at 1.22 percent and 19.6 percent respectively; surpassing the ROE target of 15 percent. With an improving operating environment, ample contingent buffer, and a strong growth outlook, we believe the annual ROE target of 15 percent is achievable in FY24E/25E. Therefore, we recommend BUY with a target price of ₹743,” said LKP.

Under the base case scenario, it expects the bank to post a ROA/ROE of 1 percent/15.5 percent by FY24E led by healthy balance sheet growth along with higher PCR and stable asset quality.

JM Financial: The brokerage has maintained its ‘buy’ call on the stock but raised its target price to ₹710 ( ₹700 earlier), implying a 24 percent upside.

“SBIN reported a stable quarter driven by healthy core PPOP growth, continued loan growth momentum and robust asset quality. Sequential higher profitability was driven by lower opex. Loan growth was well-rounded across sectors and management guided for a growth of 14-15 percent going ahead. Management indicated that they strive to maintain FY24 NIMs at levels similar to FY23 (i.e. 3 percent). We believe delivery of growth on guided lines, sustenance of NIMs near current levels and controlled asset quality parameters driving moderate credit costs will drive incremental stock returns for SBIN. We build in RoA/ RoE of 1.0 percent/17.2 percent for FY25E,” said JM Financial.

SBI’s core fundamentals continue to be stable while delivery on the growth front along with sustained margins and controlled credit costs should drive movement in the stock.

Emkay: The brokerage has retained its ‘buy’ call on the stock with a target price of ₹700, indicating an upside of 22 percent.

“Notwithstanding the slower growth and sharp margin contraction, SBI continued to deliver a strong PAT beat in Q1, on robust treasury gains and lower overheads. Though NIM contraction for SBI in Q1 was relatively higher (27 bps QoQ to 3.3 percent) vs private peers (12-20 bps), we believe most banks on a cumulative basis would in the near term exhibit similar margin contraction. The bank guides for 13-14 percent growth in FY24E led by Retail which, along with better LDR/consumption of on-balance sheet liquidity, should help sustain the FY24E margin at 3.4-3.5 percent,” said the brokerage.

“Factoring in the 1Q beat, we raise our earnings by 2-3 percent for FY24-26E and expect the bank to deliver a healthy 1-1.1 percent RoA/17-19 percent RoE without any capital raise. Despite the lower CET-1 at 10.2 percent, the bank believes that it can fund the current growth through internal accruals and is thus in no hurry to raise capital,” it added.

Motilal Oswal: The brokerage has retained its ‘buy’ call on the stock with a target price of ₹700, indicating an upside of 22 percent.

“SBI delivered a mixed quarter with NII missing estimates, led by margin contraction, while higher treasury income drove earnings beat. Business growth remains modest in a seasonally weak quarter and the bank expects to gain healthy traction in the coming quarters. A higher mix of floating loans (MCLR), which could benefit further from re-pricing will continue to support the NII and overall earnings even as the deposit cost could increase. We estimate SBI to deliver FY25 RoA and RoE of 1.0 percent and 17.8 percent,” said Motilal Oswal.