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Positive Budget proposals and strong corporate earnings have lifted the shares of State Bank of India; the stock jumped 172 per cent from its 52-week low of ₹149.45 (May 2020) to ₹408.35 (on Friday). Though again on Monday, it crossed the ₹400-mark, failed to close above the psychological mark to end at ₹396.85 on the BSE.
After the strong quarterly results, analysts hiked the target price for the stock and expect the share price to narrow down its valuation discount vis-a-vis private bank stocks. The stock has gained almost 30 per cent, since the Budget presentation, which turned the whole sentiment towards markets bullish.
The public sector banking major last week had reported a net profit of ₹5,196.22 crore for the three months ended December 31, 2020, from a record profit of ₹5,583.36 crore on the back of resolution of some large bad loan accounts.
Macquarie's confidence in SBI has increased due to its asset quality and balance sheet and believes the PSU major is on track to hit its target 1 per cent ROA (return on assets) as credit costs normalise. “We pare down our credit cost assumptions for FY21, FY22 and FY23 by 40 bps, 30 bps and 30 bps to 240 bps, 120 bps and 120 bps, respectively, resulting in a sharp earnings upgrade. We raise our target price 25 per cent to ₹450, driven by a 25 per cent increase in our target multiple to 1.0x P/BV”.
SBI’s retail asset quality has been impeccable over the last decade and with the end of the corporate credit cycle, its asset quality is finally delivering better outcomes vs even private banks, said CLSA, which is the most bullish among broking firms, has increased the target price to ₹560 from ₹385, while reiterating its Buy call.
Valuation discount to narrow
According to HDFC Securities, with the back-book sufficiently provisioned against (pro forma PCR at 67 per cent) and potential build-up in stress in line with the best-in-class private sector banks (evidence of comparable quality of underwriting in retail and SME), we see potential for a meaningful narrowing of SBIN’s valuation discount to its private bank peers.
JM Financial said, SBI has reported strong Q3-FY21 results with improvement across all key parameters: a) lower than previously feared proforma slippages and restructuring pool, b) improving operational performance and c) revival in loan and deposit growth. “We believe that SBI will be one of the biggest beneficiaries of the pick-up in lumpy corporate resolutions stalled for long and set-up of ARC to take out stress, leading to lower incremental NPAs/LLP”.
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