Fundamental Radar: 5 reasons which make SBI an attractive buy at current levels; re-rating possible

State Bank of India (SBI), part of the S&P BSE Sensex index, has been on buyers’ radar recently amid an uptick in credit growth, improved net interest margins (NIMs) as well as steady asset quality.

The stock has rallied more than 40% from March 2022 lows to hit a fresh record high of Rs 622 on 7 November 2022.

Long-term investors can look to buy the stock now or on dips for a possible target above Rs 700 in the next 12 months, suggest experts.

“SBI remains a key beneficiary of improved outlook in the overall sector, led by acceleration in credit growth and benign credit cost over the medium term,” Rahul Malani, Analyst Banking and NBFC, Fundamental Research at Sharekhan by BNP Paribas, said.

“The bank has seen sharp reduction in overall stressed assets in the last few quarters because of which there was continued outperformance in the stock in the past. We expect further rerating in the stock,” he said.

As the macroeconomic environment is improving, the brokerage firms see upside risk to SBI's earnings driven by higher margins due to the rising interest rate cycles, sustained healthy loan growth, and lower credit costs.

Rahul Malani of Sharekhan by BNP Paribas highlights 5 reasons why SBI is a strong buy at current levels:

1) NIMs to trend higher:
Out of the total advances, ~75% are floating loans – 41% are linked to MCLR and 34% are linked to external benchmark based Llending rates (EBLR). Bank has a higher mix of floating loans and a healthy CASA mix (~43%) will support margins in a rising interest rate environment.

The bank is also witnessing an acceleration in the loan growth (21%YoY, 5% QoQ vs 16% YoY, 3% QoQ in Q1FY2023 led by the retail & domestic corporate.

“We expect ~20-25 bps margin improvement from FY2022, led by repricing of floating loans. Strong retail loan growth in the high-yield segment and underwriting of higher maturity term loans driven by capex-led demand in the domestic corporate book would also contribute in improvement in margins,” said Malani.

2) Strong credit offtake likely to sustain:
Loan growth is gaining traction (21% YoY/5% QoQ) in Q2FY23 led by retail, domestic corporate book and overseas book. Retail portfolio growth was healthy at 19% YoY in Q2FY23 vs ~15% YoY in FY2022.

Within retail loans, the share of home loans and Xpress credit (personal loans) both cumulatively accounts for ~81% are growing well. The bank is seeing good success in rolling out pre-approved personal loan offers through the YONO app.

Bank expects to sustain a higher loan growth trajectory as there is good demand visibility in retail and a strong pipeline in corporate and SME books.

3) Steady asset-quality trends and, in turn, lower credit costs:
Net NPA is at a historical low (0.8%). We do not foresee any material asset-quality risk and expect overall asset quality to improve further. Corporate asset quality continues to remain strong.

“We have seen a strong rebound in retail growth, especially the unsecured book, but here the focus is still on higher-quality customer segments (majorly government salaried),” said Malani.

“We believe lower stress in the system, additional provisions, and higher coverage ratio (~78%) will drive lower credit cost for the bank,” he added.

4) Improvement in Return Ratio:
SBI’s operating metrics continue to see improvement with healthy loan growth, margin improvement, and lower slippages in turn lower core credit cost should drive improvement in return ratio in the near to medium term.

The balance sheet is strong as there are higher provisions on stressed accounts (PCR of 96% on corporate NPAs), and 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 see upside risk to margins due to higher interest-rate cycle and lower credit cost given the benign credit cycle, which should lead to improvement in return ratio profile,” said Malani.

5) View:
Sharekhan has a buy rating on SBI with a PT of Rs. 710. SBI remains the top pick among PSUs. At CMP, SBI trades at 1.1x and 1.0x its FY2023E and FY2024E core BV, respectively.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)