SBI remains a bankable bet for long-term gains
Seen rising 22% over next year, but rally could be gradual, given rich valuations
State Bank of India's (SBI'S) strong earnings in the March quarter (Q4) of 2023-24 (FY24) have boosted confidence among analysts, who believe the stock could rally up to ~1,000 over the next 12 months — about 22 per cent higher from its current level.
The rally, however, may not be steep given the stock’s rich valuations, they said.
“We value SBI stock at 1.5x (adjusted) book, and 10x FY26 earnings per share for return on equity (Roes) of around 15 per cent. Valuations are now getting closer to frontline private banks (Indusind Bank trading at 1.4x FY26 book), which implies that the riskreward has diminished even if the business is in a relatively strong position,” said analysts at Kotak Institutional Equities led by M B Mahesh. The brokerage has raised its target price on the SBI stock to ~950 from ~850.
On the bourses, SBI stock price hit a record high of ~839.6 apiece on the BSE, after the result announcement on May 9. It, however, ended 0.16 per cent lower at ~818.35 per share on the BSE on Friday, as against the benchmark S&P BSE Sensex’s 0.36 per cent gain.
During Q4FY24, SBI reported a standalone net profit of ~20,698.35 crore, up 24 per cent year-on-year (Y-OY) and 126 per cent quarteron-quarter (Q-O-Q), against the expectations of muted growth.
Operationally, net interest income (NII) rose 3 per cent YO-Y to ~41,656 crore, while the net interest margin (NIM) expanded unexpectedly to 3.30 per cent from 3.22 per cent Q-O-Q.
“SBI’S NIM expanded by 8 bps Q-O-Q to 3.3 per cent on the back of a robust broadbased loan growth of 5 per cent Q-O-Q/15 per cent Y-O-Y to ~37.67 trillion and relatively slower deposit growth of 3 per cent Q-O-Q/11 per cent Y-O-Y. Ample liquidity is advantageous for the bank, with the loan-to-deposit ratio (LDR) comfortably at 75 per cent, lowest among peers,” highlighted those at Incred Equities.
Steady margins in an aggressively competitive environment, coupled with the strong asset quality in personal unsecured loans and corporate loans add to the comfort, analysts at the brokerage said, giving an ‘add’ rating on SBI with a target price of ~1,000 (~ 800 earlier) at 1.9x FY26F P/ABV (price-to adjusted book value).
Analysts believe the nearterm outlook for SBI has strengthened led by their higher-for-longer interest rate view, which should keep NIMS at current levels. Additionally, SBI has the benefit of a low domestic credit/deposit ratio, which could increase significantly.
“While the stock offers a compounding opportunity, it is already trading at 1.2x FY26 standalone book value, leaving limited scope for a re-rating,” HSBC said in a results review report. The brokerage has a ‘hold’ rating with an increased target price of ~900 from ~700.
Earnings upgrade
Given SBI’S strongest earnings among peers, beating expectations on core NIM, core operating profit, and net profit, most brokerages have increased their earnings estimates for FY25 and FY26.
HSBC, for instance, has raised earnings per share (EPS) estimates by 8.1 per cent for FY25, 12.2 per cent for FY26, and 8.6 per cent for FY27, driven by an increase in estimated average NIM to 2.85 per cent over FY25-27, and lower estimated credit cost to 45/50 bps from 50/55 bps over FY26-27 to reflect a better asset quality performance.
“We upgrade our FY25 net profit estimate by 9 per cent to factor in better NIMS and lower credit cost, while we largely maintain FY26 estimates. We expect a return on asset (ROA) of 1 per cent. While valuations leave limited upside in the near term, the bank's balance sheet positioning is strong, providing comfort,” said Sohail Halai of Antique Broking in a coauthored report.