State Bank Of India (SBI) Share price: Buy the stock, says Sharekhan, asset quality outlook better; target price Rs 320

Sharekhan maintains a Buy rating on the SBI with a revised SOTP-based target price of Rs 320. State Bank of India is an attractive play on the gradual recovery in the Indian economy, with a healthy PCR of 71% (88% including Technical Write Off or TWO), robust Tier-1 capital ratio of 11.9%, a strong liability franchise and improved core operating profitability. SBI is India’s largest bank with attractive fundamentals and a resilient business model. Collection efficiency in domestic loans (excluding agri loans) stood at 97% at the end of Q2 FY21, which provides comfort. 

SBI sanctions and disbursements soared yoy basis in Q2 FY21 for most retail products. Asset quality outlook appears better, with the bank guiding for total slippages and restructuring of just Rs 60000 cr or FY2021 (2.5% of gross advances), which is manageable. Also, since SBI has only Rs 2000 cr of provisions (5.8% of H1 FY2021 PPOP) remaining to be taken in (likely to be taken in H2), the asset quality picture appears manageable for now.

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Moreover, SBI shared that due to restrictions on contacting clients (in agri loans, etc) it saw slippages rise, which is expected to gradually normalise. The management’s commentary has been positive in terms of asset quality, with expectations of recovery and resolution in H2 FY2021. SBI is likely to benefit from the expected consolidation in the banking sector in terms of customers and liability franchise, which augur well for the bank. Sharekhan are cautious on PSU banks but find SBI as the sole bright spot in the space with best-in-class fundamentals and book quality. Moreover, SBI’s healthy PCR and near normal collection efficiency indicates less residual stress from the legacy book. We have fine-tuned our estimates and the target multiples considering the dynamic outlook.

SBI currently trades at 1.2x / 1.0x its FY2022E / FY2023E ABVPS, which we believe are reasonable. While we are cautious on PSU Banks, Sharekhan finds SBI better placed as compared to its PSU bank peers (with respect to asset quality, capitalisation, underwriting strength, etc) with business strengths (being the largest bank in India), with consistent and reasonable margin cushions. Moreover, high coverage and improving business outlook are positive cushions. SBI’s healthy PCR of 88.19% indicates less residual stress from the legacy book.

Key risk:

SBI is at risk of further NPAs, especially in the corporate, agri and/or retail segments, due to overall macroeconomic slowdown and prolonged pandemic recovery would impact growth and profitability.

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