India’s largest public sector lender State Bank of India (SBI) saw its share price skyrocket over 6% on Thursday morning after the lender reported a 52% jump in net profits. SBI reported an increase in earnings, decline in provisions, and reduction in slippages during the quarter, boosting investor confidence. SBI’s net profit was at Rs 4,574 crore in the July-September quarter, up against Rs 3,011 crore last year. Shares of SBI have been largely muted since March-end, gaining merely 4% till October-end. However, this month, the stock price of the state-run bank has zoomed over 15% in just four trading sessions, including today, to trade at Rs 220 apiece.
Bad loans trending down
Mirroring the overall trend in the banking sector, SBI’s collection efficiencies have reached 97% with no alarming trends visible on the loan book so far. This has helped SBI trim its provisions 25% on-year basis in the second quarter. Provisions were at Rs 10,118 crore. “Our broad thesis on the bank remains unchanged. It is our preferred idea among public banks – the best to play the improvement in corporate NPL cycle with an impact of Covid likely to be relatively lower,” said Kotak Institutional Equities in a recent report. With a ‘Buy’ rating the brokerage firm has a fair value of Rs 340 per share on SBI.
Strong assets; cheap valuation
Asset quality of SBI stands strong, keeping in mind its strong franchise. Net Interest Income came in at 28,181 crore, up 15% on-year basis. Net NPLs came in at 36,500 crore in the quarter, down from 59,900 crore in the same period last year. “We value the standalone bank at PBV of 0.7xFY22E,” said LKP Securities. The brokerage firm labelled SBI as a proxy to India’s growth story while it added that, “the Bank has been retaining its market share as the credit grew by 6.9% on-year though de-grew by 0.2% sequentially.” LKP Securities has a target price of Rs 290 per share on SBI. Brokerage and research firm Motilal Oswal too is upbeat on the stock saying that SBI trades at a cheap valuation of 1x FY22E PPoP and 2.3x FY22EP/E.
With strong porivisons for what may come ahead in the second half of the fiscal year, analysts find SBI well placed to dodge and surprise. “Growth is ahead of the system – both on retail loan and CASA. Exposure to Covid-19 hit sectors is low at just ~1% of loans. Retail loans are largely to government salaried customers, reducing tail risk on NPLs,” said analysts at Axis Capital. They value the core banking business at 0.3x FY22E PBR, as they set a target price of Rs 280 for SBI shares.
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