Street bullish about SBI's growth despite bank's exposure to Jet Airways

Valuation of 1.1 times its FY20 book offers good potential to investors

Despite the recent instances of default like Jet Airways, the Street continues to keep the faith in country’s largest lender. In fact, more analysts have turned positive on the SBI stock over the last couple of quarters. Going by those polled on Bloomberg nearly 90 per cent of analysts have a ‘buy’ recommendation.

Their faith largely emanates from SBI’s size and scale of operations. With leadership across the lending and deposits platforms, SBI would stand to benefit from a revival in demand from India Inc and Indian consumers. However the most important factor which gives confidence is easing of credit costs in the coming quarters.

With slippages ratio (fresh loans turning into non-performing assets or NPA as a percentage of total loans) at 1.5–1.7 per cent in Q4, SBI is expected to see lesser accretion compared to other corporate lenders such as ICICI Bank and Axis Bank. Also, after gross NPA ratio having peaked at nearly 11 per cent in FY18, analysts expect a substantial relief on overall asset quality in FY19 as well. Those at Morgan Stanley expect the bank to close the year with sub-8 per cent gross NPA ratio and expect further moderation to six per cent in FY20. Much of the asset quality easing off is expected to be driven by strong loan growth.

With the overall trend in favour of banks, growth is expected to accelerate to 13 per cent in FY20 as per analysts. Also being the industry leader with 45 per cent low-cost CASA (current account– savings account) ratio – and also the best among public sector banks, keeping costs of funds at a check is also not an issue.

However, with nearly two years of consolidation gone by, it needs to be seen if the advantages of the merger with associates show up on operational fronts. SBI’s current cost to income ratio of over 53 per cent is one of the highest in the sector. Failure to bring it down sharply in FY20 may prompt analysts to the question the rationale for merger.

Nonetheless, with strong growth triggers ahead, valuations at 1.1 times FY20 book value offers reasonable potential for investors. The key risk, though, is fresh troubles cropping up in the coming quarters, which could derail the recovery for SBI.