State Bank of India (SBI), India's largest lender, has the potential for significant upside, according to a recent note by brokerage firm Motilal Oswal. The firm suggests that SBI shares could rise to Rs. 700 apiece from their current market price of Rs. 566, indicating a potential increase of 23.67%.
Motilal Oswal points out that SBI has delivered steady loan growth, with a 17% YoY increase in FY23, primarily driven by robust growth in the retail segment. Within retail, it said the home loans grew by 14% YoY, while vehicle financing and Xpress Credit both grew by 23% YoY. The total size of Xpress credit has reached ₹3.04 trillion, with an impressive GNPL (Gross Non-Performing Loans) ratio of 0.6%.
The brokerage firm expects SBI to sustain a 13% CAGR in loans over FY23–25, driven by consistent performance in the retail segment and further recovery in corporate loans.
On the deposits front, the bank also reported a 9% YoY growth in deposits, reaching ₹44.2 trillion in FY23. Despite intense competition for liabilities, SBI maintained a healthy deposit market share, with its CASA mix remaining steady at around 44%, the brokerage highlighted.
SBI's high mix of floating rate loans and its favorable position to maintain healthy margins, even with deposit re-pricing, support the estimated 12% CAGR in Net Interest Income (NII) over FY23–25, it stated.
Further, the brokerage said the bank's treasury portfolio is well-positioned to benefit from the recent easing of bond yields. Although the bank's treasury performance in FY23 was under pressure due to high bond yields. However, with an AFS (Available for Sale) mix of 37%, it believes the bank is well-positioned to improve its treasury performance in FY24. The brokerage, thus, estimated a 12% CAGR in other income over FY23–25 (10% decline in FY23).
Regarding profitability, retail reported strong growth, with a 165% YoY increase in Profit Before Tax (PBT), contributing 46% to total profits. The corporate segment also performed well, with a 32% YoY increase in revenue and 8% YoY growth in PBT, contributing around 40% to total profits.
However, treasury performance declined by 31% YoY in PBT. SBI's margins expanded to 3.37% in FY23, up from 3.12% in FY22. The bank expects further margin support through MCLR (Marginal Cost of Funds based Lending Rate) re-pricing, according to the brokerage.
The bank has emerged as a leader in various digital banking services, including debit card spending, POS terminals, ATMs, and mobile banking transactions. Its YONO platform has witnessed significant traction, with over 143 million downloads and approximately 60 million registered users.
SBI sanctioned 1.39 million digital loans worth Rs. 243 billion in FY23. The bank's focus on analytics for offering digital loans and credit cards to customers based on their behavior is driving growth in these areas, said Motilal Oswal.
SBI's focus on improving underwriting standards has resulted in controlled slippages, with a low non-performing asset (NPA) ratio of 0.68% in FY23 and a provision coverage ratio (PCR) of 76%.
The bank's high AUCA (Advance under Collection Accounts) book of ₹17.5 trillion and negligible stressed assets provide comfort in terms of recoveries and provisioning requirements. The brokerage firm estimates that the GNPA and NNPA ratios will moderate to 2.0% and 0.4% by FY25.
Overall, Motilal said the SBI delivered a strong performance in FY23, driven by steady business and revenue growth as well as controlled provisions. The brokerage estimates that the positive momentum will continue as utilization levels improve and retail growth remains steady.
The brokerage firm projects a 15% earnings CAGR over FY23–25 and expects SBI to maintain sustainable Return on Assets (RoA) and Return on Equity (RoE) of around 1.0% and 18%, respectively, over FY23–25.
41 analysts polled by MintGenie on average have a 'strong buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
