“BUY” SBI For A Potential Upside of 42.5% Says Sharekhan

Q2FY2022 results of SBI

On 22nd December 2021, Sharekhan has said in its latest research report that "State Bank of India's (SBI) loan book registered ~11% CAGR over FY2016-FY2021. The bank has a well-diversified asset book, supported by a large distribution network along with a strong liability franchise, which is likely to drive growth going ahead. Advances grew by 6.2% y-o-y in Q2FY2022, primarily driven by retail loans (up by 15.2% y-o-y) and international book (up by 16.2% y-o-y). While its corporate book declined by 3.9% y-o-y, impacted by lower utilisations, pricing pressure, and delayed resolutions. The bank guided for NIM of 3.2-3.3% going ahead."

According to the brokerage "The bank has one of the best-in-class liability franchises with a CASA ratio of ~46%, which enables it to manage its pressure on yields with a lower cost of funds amid stiff competition. The bank's asset quality has remained stable at ~5% in the past six quarters. Management sounded confident over corporate asset quality, stating it to be manageable with no major concerns. Additionally, the bank has strengthened its balance sheet with higher provisions and its PCR (including technical write-off) at 88.19% as of September 2021 (up 226 bps q-o-q)."

The brokerage’s take on SBI

Sharekhan Ltd. has claimed that "With the economy gradually returning to normalcy and overall corporate credit growth seeing a turnaround, we believe the bank may see credit growth picking up in the corporate segment, which otherwise has been muted for quite some time now. Management is optimistic on growth in the international book also. The un-availed credit limit stood at Rs. 5 trillion, which is expected to be availed due to increased spending by the government on infrastructure with the bank having a decent pipeline of investment proposals. While for the bank, the retail segment continues to perform well. The bank is a strong player in the retail segment (~42% of total loans), which is further supported by the best liability franchise. We expect its loan book to post an ~11% CAGR over FY2022E-FY2024E. On the operating performance, the bank has guided for NIM to be at 3.2-3.3% going ahead. Hence, armed with a strong franchise, the bank expects to increase its market share in credit growth."

According to the research report of the brokerage "Most PSU banks faced high quantum of NPAs in the past, which had impacted their profitability coupled with a weak economic environment. However, SBI has strengthened its balance sheet by creating excess coverage/higher provisions on NPLs. The bank's PCR (including technical write-off) stood at 88.19% as of September 2021 (up 226 bps q-o-q). Apart from this, the bank has a well-diversified loan book. Although there are concerns of rising competition, management is still confident about asset-quality trends and growth outlook with stable margins going ahead. Further, it has increased its focus on profitability than on growth. SBI remains well capitalised as compared to its peers with a best-in-class liability franchise. The bank's subsidiaries - SBI MF, SBI Life, and SBI Cards have also demonstrated robust performance over the past few years, thus supporting the SOTP valuation of the core bank."

Buy SBI With A Target Price of Rs. 650 Says Sharekhan

Sharekhan has stated in its research report that "At the CMP, SBI currently trades at 1.5x its FY2023E P/BV, which we believe is at attractively lower valuations and is well-positioned to take benefits of the economic recovery. Additionally, it offers a good investment opportunity as the stock has corrected by 16% from its peak. We find SBI is better placed with respect to asset quality, capitalisation, and underwriting strengths. With its business strengths (being India's largest bank), we expect NII and profitability to bounce back in the next 2-3 years, helped by higher margins. We expect the bank to benefit from a recovery of the benign corporate credit cycle. In addition, SBI's stronger deposit franchise, support from subsidiaries, and a low risk of dilution (as compared to PSU bank peers) further support valuations. Hence, we reiterate a Buy rating on SBI with a revised SOTP-based price target (PT) of Rs. 650."

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.