Buy This Banking Stock For 40% Gains, Rising Rate Cycle To Benefit

Broking firm, Emkay Global has recommended buying the stock of State Bank of India for gains of nearly 40%. The firm remains upbeat on the stock for a number of reasons.

Growth set to improve, and so are margins/fees - leading to better core profitability

Current market price	Target price	Per cent gain
Rs 491	Rs 680	40%

According to Emkay Global, State Bank of India has promised above-systemic credit growth of 9.5-10% in FY22E. It also expects +100bps above nominal GDP growth in FY23E. We have slightly trimmed our FY23 credit growth estimate for SBI by 100bps to 12.7% from 13.7%, factoring in some moderation in GDP growth amid the Russia-Ukraine conflict, but expect the growth to improve to 15%/16% by FY24E/25E.

"SBI should benefit on the margin front in a rising rate cycle, given its continued cost advantage, higher retail orientation (including better-yielding Xpress Credit), and most importantly, better LDR (domestic at 65%-70% vs. current 61%). As per management, the visible pick-up seen in corporate activity, transactional banking and retracement of retail fees (including waivers/discounts) should lead to overall better fee growth as well, partly blunting the impact of rising G-sec yields (protected till 7%) on its treasury performance. Taking better NII/fee growth into account, we expect FY22-24E core-profit CAGR of 20%, in line with private peers," Emkay Global has said in its report.

Stepping up digital game to tap new-age customers and contain costs in long run

SBI believes that 'Digital' is going to be the soul of future retail/corporate banking, and is stepping up its digital offerings via YONO 2.0 App and fintech tie-ups.

"For the first time, the bank has hired a marquee private banker (Mr. Nitin Chugh - ex digi-banking head of HDFC Bank) as DMD to ramp up its digital offerings in line with its private peers. According to management, it has 45mn customers on YONO App, out of its 460 million customers, and is currently on boarding 1million customers per month. Further, nearly 30% of retail assets/67% of savings a/cs are opened via YONO, which the bank expects to rise meaningfully, leading to a better cost-income ratio in the long term," Emkay Global has said.

Improving risk-adjusted return profile, capital self-sufficiency and growth prospects call for better valuations

After the recent market correction due to the Russia-Ukraine conflict, SBI is trading at attractive valuations of 0.9x Mar'24E P/ABV. SBI has come a long way and is now far better placed in terms of capital, asset quality and earnings as demonstrated during the Covid peak. In our view, the bank's higher retail orientation and steady improvement in risk-adjusted returns (RoRWA) call for a sustained re-rating. Thus, maintain Buy/OW in EAP, with a target price of Rs 680 (now at 1.5x Mar'24E core ABV + subs/Inv valuation of Rs 211).

According to the broking firm, the key risks remain treasury losses stemming from a sharp rise in G-Sec yields, higher NPA formation in the corporate/SME books, and slow growth.

While we do carry brokerage recommendations, we suggest investors buy in small quantities as markets continue to be volatile.