Brokerages turn bullish on SBI on attractive valuation; see 20-44% upside

From its recent low of Rs 150.85 apiece (closing basis) touched on May 22, 2020, the stock has rallied 39 per cent on the BSE, data show

India’s largest state-owned bank, State Bank of India (SBI), has seen back-to-back upgrades by brokerages — both foreign and domestic.

Attractive valuation relative to private peers, improvement in the financial sector, and timely support from the government and Reserve Bank of India (RBI) in the wake of Covid-19 pandemic are boosting analysts’ confidence, apart from impressive June quarter (Q1FY21) numbers.

From its recent low of Rs 150.85 apiece on May 22, the stock has rallied 49 per cent on the BSE, as against 28.67 per cent gain in the benchmark S&P BSE Sensex till Friday, data show. And there is still some steam left, brokerages believe. From the current price of around Rs 220, the one-year return could range between 15 per cent and 38 per cent according to brokerages’ estimates.

Seen as a proxy of improving confidence in the financial sector, Goldman Sachs in a recent report noted that SBI’s current stock valuation (0.2x FY21E book value per share) makes for an attractive entry point. “In our bull case scenario, if the growth trajectory improves and asset quality turns out better than expected, the stock could further re-rate to 0.7x FY21E BVPS, implying 70 per cent upside to current prices,” the report said.

Analysts at UBS, meanwhile, said in a report that SBI is trading at a historically low valuation (0.3x FY21E P/BV), underlining that most of the negatives are priced-in. The second trigger, analysts say, is the lender’s reduced involvement in YES Bank. The private lender recently raised Rs 15,000 crore via a follow on public offer which, Goldman Sachs noted, reduced SBI’s stake in the bank from 48 per cent to 30 per cent, taking away tail risk.

“With YES Bank slowly showing signs of turnaround, the risk of hand-holding a troubled lender is now over,” said CLSA in an August 20 report.

The other factor firing up optimism is the bank’s Q1 result. The bank clocked 81.18 per cent rise in net profit to Rs 4,189.34 crore, as against Rs 2,312.2 crore a year ago. Its pre-tax profit was up 36.8 cent to Rs 5,559.7 crore in Q1.

Besides, its total term-loans under moratorium were 9.5 per cent in Q1 compared with 23 per cent at the end of March quarter. This coupled with Covid-related provisions at around Rs 3,000 crore and lower special mention account (SMA) book gives comfort to the analysts.

“A comfortable provision coverage ratio (PCR) at 71 per cent as of Q1FY21 augurs well for the bank. Adjusted for loans under moratorium, the PCR stands at 45 per cent which is one of the highest among our coverage universe,” said the Goldman Sachs report.

Analysts believe SBI is best suited to mirror the economic recovery. Domestic brokerage JM Financial observes that the thesis of SBI stock price tracking overall domestic economic trajectory continues to play out and return to normalcy could reflect in greater valuations for SBI.

Unrealised opportunity that the bank has through monetisation of its subsidiaries and the fact that SBI has been able to maintain its market share in retail assets, current account and savings account (CASA), overall loans, and deposits through the last decade despite tough competition from private players are some of the other positives for analysts that have made them bullish on the stock.