Stock To Buy: This PSU Bank Reported Steady Performance In Asset-Quality Metrics, Buy For 29% Gains

Stock Outlook & Returns

The current market price (CMP) of SBI stood at Rs 530.60 apiece. On March 08, 2022, the stock hit the 52-week low level at Rs 425 apiece, whereas, on September 15, 2022, it touched the 52-week high level at Rs 578.50 apiece. 
 
In the past 1 week, it gave a 3.63% negative return. In the past 3 months, the stock gained around 13.89%. In the past 1 and 3 years, it gained around 17.13% and 95.94%, respectively. In the past 5 years, the stock gave 109.02% positive returns.

NIMs to trend higher

Out of the total advances, 74% are floating loans - 40% are linked to MCLR, 11% are linked to other EBLR, and 23% are linked to the repo rate. A higher mix of floating loans and increased CASA mix (~44%) will support margins in a rising interest rate environment. The bank reported strong LCR of 138% and lower CD ratio of ~70% in Q1FY2023, thus the bank has been exhibiting its pricing power in terms of pricing of deposits as it has increased retail TD rates only by ~40 bps, while majority of the hike is passed on to bulk deposits (180-200 bps), which have lower share. The bank is also witnessing acceleration in loan growth (+16% YoY, 3% QoQ) in Q1FY2023, led by the retail segment (+19% YoY, 3% QoQ). We expect 10-20 bps margin improvement from FY2022, led by repricing of loans and strong retail growth in the high-yield segment. 

Steady asset-quality trends and, in turn, lower credit cost

The brokerage said, "We do not foresee any material asset-quality risk and expect overall asset quality to improve further. Corporate asset quality remains strong and in the SME book, especially ECLGS has not seen incremental stress formation. We have seen strong rebound in retail growth, especially the unsecured book, but here the focus is still on higher-quality customer segments (majorly government salaried). GNPLs in the retail segment are best-in-class in the industry. In Q1FY2023, core credit cost stood at 62 bps annualised (calculated as a % of average advances) with ~80 bps of net slippages. Restructured book stands at ~1% of advances and SMA 1 and 2 book stands at 0.25% of advances. However, the bank carries additional non-NPA provisions at ~1% of advances. We believe lower stress in the system, additional provisions, and higher coverage ratio (75%) will drive lower credit cost for the bank. Revision in estimates: We have increased our FY2023E/FY2024E earnings estimates, factoring in higher margins and lower credit cost. Moreover, we have introduced FY2025E numbers in this note."

Valuation

At the CMP, SBI trades at 1.1x and 1.0x its FY2023E and FY2024E core ABV, respectively. SBI's operating metrics continue to see improvement along with healthy system loan growth and lower credit cost should drive improvement in return ratio in the near to medium term. The balance sheet is strong and capital levels are adequate to achieve growth. The bank is well positioned to gain market share on the business front. SBI's strong deposit franchise and better performance from subsidiaries are likely to favour the business. "We maintain our Buy rating on SBI with a revised PT of Rs. 680. SBI remains our top pick among PSUs. Key Risks Economic slowdown due to which slower loan growth and higher-than-anticipated credit cost especially from small business loans portfolio and wheels could affect earnings," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.