Bull case for SBI, as open interest builds

Robust Tier-I capital at 10% and robust earnings outlook for FY16 drive momentum

Shares of the country’s largest lender, State Bank of India (SBI), have risen by 37.76 per cent over the past two months. This jump comes after its underperformance over the last year compared to the Sensex (29 per cent) and Bankex (22 per cent), as its profitability declined and accretion of stressed assets remained high. Like it does from time to time, the Street’s view on the bank has again turned positive. Sharekhan’s derivatives team is recommending a Bull Call Spread, as the stock is trading above its 10-day volume weighted average price of Rs 2,000 and can climb higher. Also, the open interest positions have been building in the past few trading sessions.

While some of market’s optimism has had a rub-off effect on the stock, analysts have also come up with some fundamental reasons for their upgrades. SBI appears to be relatively better off compared to other public sector banks, which are under severe stress.

Analysts claim SBI’s percentage of net stressed loans remains among the lowest among other public sector banks at 6.7 per cent. Motilal Oswal Securities says net stressed loans for Punjab National Bank, Bank of Baroda and Bank of India stand at 12.4 per cent, 7.9 per cent and 6.3 per cent, respectively.

There are other factors, too, that have led to analysts changing their earlier bearish view on the stock. The bank has been able to maintain its liability franchise, despite the deregulation of savings accounts deposit rates. The ratio of savings account stands at 35 per cent for SBI. Between FY09 and FY13, the bank has built a considerably strong franchise and its deposit growth rate has been at par or marginally better than that of the sector. Across rural and urban areas, its market share in savings account deposits remains 25 per cent. This growth has helped offset some of the decline in the current account share.

The other big reason for the optimism is driven by the bank’s strong Tier-I ratio of 10 per cent. Kotak Institutional Equities expects the bank to deliver 16 per cent earnings CAGR and ROEs of 11 per cent in FY15-16. The brokerage values the stock at Rs 2,050, which implies 1.4x adjusted and core book value and 8x earnings.

This upgrade comes after factoring in higher slippages in the current year as a percentage of total loans. However, the Street believes the stress emanating from select sectors will abate. The rupee’s decline will aid the textile sector and a possible lift of the mining ban will help the iron and steel sector, which account for 30 per cent of non-performing loans.