Everyone is bullish and sees value in this stock. But no one wants to buy it

NEW DELHI: There is hardly any brokerage which does not have a ‘buy’ or ‘outperform’ rating on this PSU lender. The stock has been a consensus ‘buy’ pre-Covid as well as Covid periods. Yet, it has failed to catch up with the broader market recovery since March lows.

Analysts say the stock possesses hidden value in it numerous subsidiaries, but other fears seem to eclipse those value propositions.

This bank is State Bank of India (SBI).

In the publicly available Reuters Eikon database, the stock had 23 ‘buy’, 17 ‘outperform’, five ‘hold’, one ‘underperform’ and one ‘sell’ ratings for the stock as of July 30.

The stock has risen just 5 per cent since March 24, against a 50 per cent leap for BSE Sensex from its 52-week low of 25,638. Investors fear asset quality at the country’s largest bank might deteriorate in the coming months.


While private banks have turned conservative in lending, investors fear SBI, being the largest PSB, could be asked by the government to add its bit to revive credit growth in struggling sectors.

SBI Chairman was among the chiefs of banks and non-banking financial companies (NBFCs) that PM Narendra Modi met on Wednesday to discuss the tepid credit growth scenario and explore ways for financial empowerment through technology, weigh prudential practices for stability and ensure sustainability of the financial sector.

NPA worries
"Investors are worried that being the largest bank, SBI could be one of the biggest lenders to MSMEs and other Covid-impacted sectors at a time when private peers could be going slow,” says Rusmik Oza of Kotak Securities.

He, however, finds SBI valuations compelling as the stock trades at just 0.8 times its 12-month forward price-to-book value. The lender has value unlocking opportunities in a few subsidiaries, he said.

“The current price of SBI builds in most of the negatives on the NPA front. We expect the stock to hit Rs 250-300 levels once the dust settles over the next one year,” he said.

In its latest Financial Stability Report, RBI has projected gross non-performing assets of lenders to rise from 8.5 per cent to 12.5-14.7 per cent by March 2021, depending on the severity of stress in the economy.

Sunil Jain, Head of Research at Nirmal Bang Securities, said the market is largely worried over NPA (non-performing assets) buildup, which might surface when the EMI moratorium ends.

SBI’s gross non-performing assets (NPAs) stood at 6.15 per cent of total advances as of March end, compared with 6.91 per cent as of December end and 7.53 per cent in the year-ago quarter.


“SBI-led lenders’ rescue of YES Bank and merger of six smaller banks with it have also added to investor worries,” Jain said.

The situation for SBI will get clearer over the next one-two quarters, Jain said. “Even after considering a 200-300 basis points of additional NPAs, SBI would still look attractive due to the value unlocking opportunities available at its subsidiaries,” he said.

Bank stays confident
SBI Chairman Rajnish Kumar says 82 per cent of its retail customers till May end paid two or more installments during the EMI moratorium. Also 92 per cent of retail customers paid one or more installments.

“When there is a disruption in cash flow, under such circumstances, globally, all regulators -- including the ones who are supposed to be as tough as our Reserve Bank of India -- are realising the situation. I do not subscribe to the view that the credit culture would be impacted by this moratorium,” he told ETNOW in a June interview.

Edelweiss Securities says the bank has sharpened focus on retail credit to provide itself the necessary growth momentum and improve spreads. “Further, to manage operations better, SBI has integrated its treasury operations and created a common technology platform across all subsidiary banks. This has increased synergies among its banking subsidiaries,” it said.

Data showed SBI stock has not only underperformed private lender, but many PSU peers as well.

Many smaller PSU banks such as Indian Overseas Bank, Central Bank, UCO Bank and Bank of India have seen 40-50 per cent rally from their March lows. Analysts feel such outperformance was largely fuelled by talks of privatisation in the banking space.

Jain said retail investors' fancy for low-priced stocks also led to their outperformance vis-a-vis SBI.

Umesh Mehta of Samco Securities said SBI is the market leader in many aspects, including assets, deposits and branches. “That said, its profitability has been inferior to private lenders, due to inefficient use of capital, even though it is best among the PSBs. From a shareholding point of view, the stock has never been a money spinner. The volatility is low on both sides,” he said.

Value unlocking in subsidiaries
What gives analysts confidence on State Bank of India is the value being created by its subsidiaries, which throws up solid value unlocking opportunities.

Analysing SBI’s annual report, Motilal Oswal in a recent note said SBI’s subsidiaries – SBI MF, SBI Life Insurance, and SBI Cards – have displayed robust performance and gained scale and market shares in their respective segments.

SBI monetised nearly Rs 13,800 crore by diluting stakes in insurance and cards businesses during FY17–20.

Subsidiary SBI Cards, which got listed in March, has a market share of 18.2 per cent on a card base of 1.05 crore and 17.9 per cent share in card spend.

This arm witnessed 42 per cent growth CAGR in card spend over FY17–20 and saw a profit growth of 47 per cent CAGR during this period. Return ratios remain healthy, with RoE at 27.4 per cent as of FY20.

SBI Life Insurance is seeing 25 per cent growth CAGR in un-weighted new business premium over FY15–20 against 18 per cent for private players. “It has one of the lowest cost structures, with a total expense ratio of 9.9 per cent, enabling SBI Life to deliver operating RoEV of 20.5 per cent in FY20 against 17.3 per cent last year,” Motilal said.

SBI Asset Management is the country’s largest AMC with a total asset under management (AUM) of Rs 3.7 lakh crore and a market share of 13.8 per cent. AUM for this arm has increased at 38 per cent CAGR over FY15–20 while PAT expanded at 30 per cent CAGR over the same period to Rs 600 crore.

SBI General Insurance saw 45 per cent growth in gross written premiums and while market share improved to 3.59 per cent in FY20 from 2.77 per cent in FY19.

“SBI has prudently improved PCR (provisioning coverage ratio) over the past few years and has one of the lowest stressed assets among corporate banks. The proportion of the moratorium book also stands lower against most peers, aided by higher exposure to salaried (government and PSU) employees. This would enable the bank to maintain strong control over credit cost as the Covid-19 impact becomes visible in H2FY21,” Motilal Oswal said.

The brokerage has a price target of Rs 280 on the stock.