Strong Q2 results drive earnings, target price upgrades for SBI, BoB

State Bank of India (SBI), and Bank of Baroda's (BoB's) remarkable performance in the July-September 2022 quarter of the current fiscal (Q2FY23) has resulted in earnings, and target upgrades pouring in from brokerages. Analysts see up to 31 per cent and 17.6 per cent upside in SBI and BoB's stock, respectively from a one-year perspective. Both banks had announced their respective Q2-FY23 numbers on Saturday.

At the bourses, shares of SBI hit a fresh record high of Rs 623, surging 4.8 per cent intra-day trade on Monday, while those of BoB claimed a new 52-week high of Rs 161.5, up 12 per cent intra-day. 

They settled 3.3 per cent, and 9.4 per cent higher, respectively, as against 0.47 per cent gain in the Nifty50 index. The Nifty Bank, and Nifty PSU Bank indices advanced 1 per cent, and 4.5 per cent, respectively.

Global brokerage Jefferies has raised FY23 earnings estimates by nearly 16 per cent, and FY24-25 estimates by 10-14 per cent for State Bank of India. It sees 14 per cent CAGR in loans over FY22-25, which along with margin expansion, and lower credit cost should aid return on asset (RoA) to 0.89 per cent/ return on equity (RoE) of 16.3 per cent in FY24, they said, while valuing SBI at Rs 760 in its base case scenario, and at Rs 860 in bull-case. The bear case scenario for Jefferies values SBI at Rs 520.

Meanwhile, HSBC has raised its earnings per share (EPS) estimates for SBI by 8.7 per cent/1.8 per cent/3.3 per cent for FY23/24/25, and has increased loan growth estimates to 15.3 per cent CAGR over FY22-25 (estimated) versus 12.9 per cent earlier.

"SBI's positive surprise on core profitability has played out faster than our estimates, leading to a beat of 6 per cent on net interest income (NII) and 10 per cent on PAT in Q2FY23. We continue to stand by that thesis on the following: NIM could continue to see some more benefits of levers with slower repricing of deposits; capital is adequate, and not needed immediately; and credit costs could continue to undershoot the long-term trends for a longer period," it said.

That said, Kotak Institutional Equities cautioned that a strong re-rating of the bank has been seen in recent quarters driven by earnings upgrades, on the back of lower credit costs. "Since, we are getting closer to peak RoEs, and re-rating is likely to get a lot slower," their analysts wrote in a post-result note.

SBI reported 75 per cent YoY earnings growth, led by operating profits doubling YoY. Revenues grew 12 per cent on year with NII growth at 13 per cent YoY, whereas non-interest income grew 8 pr cent YoY. Net interest margin (NIM) expanded 30 basis points (bps) quarter-on-quarter (QoQ) to 3.3 per cent. Loans grew 20 per cent YoY, which is at a decade high. Asset quality metrics showed further improvement, with the gross NPL ratio declining 40bps sequentially to 3.5 per cent, and net NPL ratio declining 20bps sequentially to 0.8 per cent. RoE is at 18 per cent, and RoA at 1 per cent of loans.

As regards BoB, Motilal Oswal Financial Services has increased its FY23 earnings by 10 per cent, factoring in higher NII and lower credit cost. It has maintained its estimates for FY24.

BoB reported a PAT of Rs 3310 crore, driven by higher NII (Rs 1,630 crore; up 34 per cent YoY/15.1 per cent QoQ), and lower provisions, as margins increased 31bp QoQ to 3.33 per cent. Loan book grew 21 per cent YoY and 4.6 per cent QoQ. Retail loans (up 7.4 per cent QoQ) and international loans (up 8.6 per cent QoQ) were the key growth drivers. While overall deposit growth was also robust (up 13.6 per cent YoY/5.6 per cent QoQ), retail term-deposit growth was muted at 1.2 per cent QoQ.

"We raise FY23/24/25 EPS estimates by 26/33/26 per cent, respectively, largely driven by the increase in loan growth estimates (13.7 per cent CAGR vs 12.7 per cent earlier), and increase in NIM estimates (average NIM of 3.3 per cent vs 3.1 per cent earlier). We estimate a 16 per cent CAGR in operating profit, and a 26 per cent CAGR in EPS over FY22-25," said HSBC.