Banking Stock To Buy For 40% Gains As Recommended By Motilal Oswal

Buy SBI for a price target of Rs 600

The brokerage sees an upside of 40% on the stock of SBI with a price target of Rs 600, as against the current market price of Rs 431.

According to the brokerage the balance Sheet cleansing is largely over and strong asset quality outlook remains.

"State Bank of India's focus on strengthening its Balance Sheet has enabled a sharp decline in gross non performing assets to Rs 1.3 trillion in FY21 from Rs 2.2 trillion in FY18. Gross non performing assets declined by 43% over the past three years, while PCR increased to 68% at present (85% PCR on the corporate book) from 40% four years back," the brokerage has said.

Improvement in asset quality

According to Motilal Oswal, State Bank of India has cumulatively written off Rs 1.5 trillion since FY18.

"The improvement in asset quality has been sharper than most peers, including Private Banks. While 1QFY22 saw a marginal increase, we believe that the Balance Sheet cleansing is largely complete, with the focus shifting to earnings recovery and pursuing growth. Controlled restructuring (0.8%) and SMA book (0.5%) provides a further comfort on asset quality and will drive a sustained reduction in credit cost," the brokerage has said.

The elephant is set to dance

According to Motilal Oswal, the elephant is set to dance with RoE to improve to 15%. "State Bank of India earnings in FY21 have been more than the sum of what it did in the preceding five years (FY16-20). Its FY22E earnings will be close to the sum of the past six years (FY16-21). It appears well positioned to report strong uptick in earnings, led by normalization in credit cost. This, along with expected uptick in core operating performance, will further propel earnings growth. We estimate PPOP at 14% CAGR over FY21-23E v/s 6% CAGR (FY18-21), enabling State Bank of India to achieve 15% RoE (decadal high) by FY23," the brokerage has said.

SBI valuations

According to Motilal Oswal, mong PSU Banks, State Bank of India remains the best play on a gradual recovery in the Indian economy, with a healthy PCR, Tier I of 11.3%, strong liability franchise and improved core operating profit.

"While business trends were impacted by the lockdowns, loan growth is likely to recover gradually over FY22-23E. Even slippages are expected to moderate meaningfully over 2HFY22 as asset quality remains impeccable in the Retail book. We estimate credit costs of 1.6%/1.3% for FY22E/FY23E. We project RoA/RoE of 0.8%/14.6% by FY23E. Subsidiaries (SBI Mutual Fund, SBI Life, SBI Card, SBI Cap) have exhibited robust performances over last few years, supporting our SoTP valuation. Maintain BUY, with a target price of Rs 600 per share (1.3x FY23E ABV + Rs 190 /share from subsidiaries," the broking firm has said.

Disclaimer

The article is informational in nature, which is taken from the brokerage report of Motilal Oswal. Please do consult a professional advisor before you invest in equities. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and authors do not accept culpability for losses and/or damages arising based on information in the article.