scorecardresearchState Bank of India: Motilal Oswal says SBI can rise nearly 40%; Key reasons

State Bank of India: Motilal Oswal says SBI can rise nearly 40%; Key reasons

Updated: 22 Mar 2023, 03:30 PM IST
TL;DR.

India's largest public sector lender, State Bank of India (SBI) has also lost over 15 percent in 2023 YTD after a 35 percent rise in 2022. In the last 1 year, the stock is up just 6 percent.

India's largest public sector lender, State Bank of India (SBI) has also lost over 15 percent in 2023 YTD after a 35 percent rise in 2022. In the last 1 year, the stock is up just 6 percent.

India's largest public sector lender, State Bank of India (SBI) has also lost over 15 percent in 2023 YTD after a 35 percent rise in 2022. In the last 1 year, the stock is up just 6 percent.

After a stellar 2022, the Nifty PSU Bank index seems to be a victim of profit booking. The index has shed 14 percent in 2023 YTD after surging 71 percent in the previous calendar year.

While the fundamentals of the PSU Banks remain strong and the long-term investment opportunities remain intact, the overall weakness in equity markets and knee-jerk reactions from events like the allegations on Adani Group by Hindenburg Research and the liquidity crisis in major US and European banks have impacted the lenders in the short term.

India's largest public sector lender, State Bank of India (SBI) has also lost over 15 percent in 2023 YTD after a 35 percent rise in 2022. In the last 1 year, the stock is up just 6 percent.

In 2023 so far, the stock has been completely flat in March till now after a 5.5 percent decline in February and 9.8 percent decline in January.

Despite the recent corrections, the stock is a long-time favorite of investors. 42 MintGenie analysts cover the stock and it has 24 'strong buy' recommendations, 17 'buy' calls, 1 'hold' call, and zero 'sell' recos.

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SBI stock price trend

Post its meeting with SBI Chairman Dinesh Kumar Khara, domestic brokerage house Motilal Oswal also retained its buy call on the stock on the back of a positive margin outlook with a target price of 725, indicating a 39 percent upside from its current market price of 521.75 (as on March 21, 2023). SBI is its most preferred pick in the banking space.

The global banking system has been facing challenges primarily due to liquidity issues rather than asset quality, noted the brokerage, adding that the portfolio duration and concentration of loans/deposits under various categories have also caused problems. However, SBI's Khara believes that the Indian banking system has remained quite resilient thanks to active supervision and higher governance standards set by the RBI. SBI does not see any significant challenges to the Indian banking system, he said.

"The domestic market remains fairly strong, which should support growth. The corporate sector is likely to see a pick-up as the focus on infrastructure will revive owing to the government’s push (70 percent of fresh capex being led by the private sector)," Khara told MOSL.

He also pointed out that SBI has a strong pipeline of sanctions and its undisbursed term loans are coming down (-26 percent QoQ), which indicate that utilization is increasing. The manufacturing, export, renewables, batteries and EV segments are likely to be the key growth drivers, he added.

Further, the rural sector is also witnessing an improvement due to Agri startups, which, along with SME value chains, are focusing on improving the efficiency. Overall, loan growth is likely to moderate from the current level of 16-17 percent and credit growth is likely to be 14-16 percent over FY23/FY24, estimated Khara.

Margin to witness expansion

Khara also told MOSL that the bank believes that there is an opportunity to pass on the MCLR hike which along with lagged re-pricing of deposits, which should boost margin in the coming quarters. Quality of advances remains fairly under control, with a constant moderation in asset quality ratios, slippages have also been under control and the bank does not expect any challenges.

The initial target is to bring down the NPA and SMA books on a yearly basis. The GNPA ratio in the retail segment is 0.67 percent, while the average LTV stands at 55-60 percent, and thus the bank does not expect any challenges going ahead. The focus remains on keeping the credit cost at 50 bps, he added.

On the recovery front, since chunky recoveries are largely over, the bank expects granular recoveries going ahead. In terms of the restructured book, the bank is carrying PCR of 30 percent with controlled NPAs; hence, the bank does not expect any significant challenges from this book, said Khara.

YONO

Khara further informed that the SBI app YONO has a registered user base of 60 million and has already generated 1 lakh crore in loans. It is opening over 30,000 savings accounts daily, while in principal approval for gold loans stands high at 52-53 percent, he added.

Further, the cost of acquisition is lower for YONO, which is likely to result in operating efficiency and moderation in cost ratios. While the cost-to-assets ratio remains among the lowest, the SBI believes that it can further improve the ratio by a few basis points.

While the initial target was to deliver RoA of 1 percent and RoE of 15 percent by FY24, the bank is ahead of its target and expects to achieve this by Mar’23 or 1QFY24. Overall, the lender targets to deliver RoA of over 1 percent on a sustainable basis, highlighted Khara.

Overseas portfolio

SBI's Khara further said that the lender does not expect any challenges with respect to asset quality. About 34 percent of the book pertains to local lending, 38 percent being ECB loans linked to high-rated Indian corporate and 28 percent being trade finance (factoring). The GNPA ratio stands at 0.41 percent and has witnessed further moderation, he added.

Dinesh Kumar Khara joined SBI as a Probationary Officer in CY84 and has over 37 years of experience in all facets of banking. He completed his MBA from FMS New Delhi and his M.Com from Delhi School of Economics. He is a Certified Associate of the Indian Institute of Bankers (CAIIB).

Valuation

As per the brokerage, SBI’s robust performance has been aided by strong loan growth, margin expansion and lower provisions.

"The improvement in its treasury performance (which supported other income) and controlled opex led to healthy growth in core PPOP. A high mix of floating loans, which will benefit from the re-pricing of MCLR loans, will continue to aid NII and earnings, even as the cost of deposits may see some increase. The asset quality performance remains strong with consistent improvements in headline asset quality ratios, while the restructured book remains under control at 0.9 percent," it explained.

It estimates SBI to deliver RoA/RoE of 1 percent/17.2 percent by FY25.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

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First Published: 22 Mar 2023, 03:30 PM IST