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Axis Securities assigns 'buy' to State Bank of India, target price Rs 240

Chitranjan Kumar     August 5, 2020

Axis Securities has initiated 'buy' rating to State Bank of India (SBI) with a target price of Rs 240. The brokerage said the SBI stock currently trades at less than 1x its FY22E book value, which is attractive among public sector banks, providing a cushion to margins. The bank's strong position in terms of liability franchise, coupled with an impeccable reach and business strength makes it well placed to ride over medium-term challenges, the rating agency said.

On Wednesday, shares of State Bank of India closed trade at Rs 191.50, down 0.08 per cent, against previous closing price of Rs 191.65 on the Bombay Stock Exchange. The stock hit 52-week high of Rs 351 on November 28, 2019, and 52-week low of Rs 149.55 on May 22, 2019.  

"Among PSU banks, SBI remains the best play on the gradual recovery in the Indian economy, with a healthy provision coverage ratio (PCR), robust capitalisation, a strong liability franchise and improved core operating profitability," said the rating agency.

According to the brokerage firm, the key factors that will drive SBI stock's performance are strong liquidity with huge deposit inflow during uncertain times along with improvement in asset quality and provision coverage ratio (PCR). Improvement in performance of subsidiaries will also add further value to market share.

Also Read: Loan moratorium beyond August will do more harm than good: SBI

The agency, however, said that prolonged lockdown and consequent rise in NPAs can pose risks to bank's profitability. The risk of moral hazard arising from farm loan waivers could also lead to higher slippages in the agriculture sector, it added.

SBI has reported strong operating performance in the last couple of years. Deposit growth stood strong and aggressive cut in savings and term deposit rates enabled margin improvement unlike the decline for many private banks. Slippages were lower, helped by the RBI's dispensation, which resulted in asset quality improvement.

The agency believes that SBI has prudently improved PCR over the last few years and has one of the lowest stressed assets amongst corporate banks. The proportion of moratorium book has also improved further to 9.5 per cent of terms loans as compared to 23 per cent earlier. "The legacy book being provided for, wage provision needs also being limited, and scope for net interest margin (NIM) expansion augur well for the bank's future earnings" it said.

Also Read: SBI Q1 results: Profit rises 81% to Rs 4,189 crore, NII stands at Rs 26,641.6 crore

Going forward, SBI's asset quality will be under the lens in wake of lockdown and macro uncertainties on account of COVID-19, said ICRA.  However, the management commentary on NIM and asset quality denotes confidence and a healthy provisioning cover adds comfort.  

The bank had reiterated that it had taken most of the provisions for the legacy book of large stressed exposures into account. SBI has been the first mover in driving sectoral interest rate which places it at an advantage to other PSU bank peers, providing a cushion to margins. SBI's strong position in terms of liability franchise, coupled with an impeccable reach and business strength makes it well placed to ride over medium-term challenges. Subsidiaries can continue to add further value with improving market share in most subsidiaries.

Axis Securities expects SBI to report muted loan growth over FY21-FY22E at around 3-11 per cent while deposit growth pegged at 6 per cent in FY21. This will aid stable net interest income at around 3.1 per cent, while further cost income improvement to 51-52 per cent will support operating performance, it said.

For the first quarter ended June 30, 2020, SBI reported a consolidated interest income of Rs 4,5711.40 crore, up 3.49 per cent from Rs 4,4170.77 crore in March quarter and up 1.18  per cent from Rs 45177.78 crore in the year ago period. The bank reported net profit after tax of Rs 5,203.49 crore in Q1 FY21. The bank has built COVID-19 provisions of Rs 1,840 crore, taking the total COVID related provisions to Rs 3,000 crore.

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