Hot stock alert! This state-owned lender is set to rise by a whopping 22% - What share bazaar investors should know

The bank which can defy the negative forces is a bank worth staying with. That said, largest lender State Bank of India (SBI) has seen their own level of shocks, and have proven its worth at various occasions. SBI led the way for the government’s merger agenda, by acquiring its six associate banks. Not only that, having the highest stressed asset, SBI has maintained its strong foothold and stability. In fact, the bank is moving towards stable gross NPA, turning losses into profits and good credit growth. On Thursday, SBI ended at Rs 314.70 per piece up by 1.12%. The bank has touched an intraday high and low of Rs 315 per piece and Rs 308.95 per piece on Sensex respectively. Interestingly, now is the right time to make buying in SBI, as an expert from Antique Stock Broking has given a buy rating with a target price of Rs 385 per piece. From the current level, SBI will make investors further richer, as it is expected to rise by over 22%. 

Sohail Halai and Amit Mishra analysts at Antique Stock Broking said, “We expect SBIN earnings to rebound to INR370bn by FY21e vs. INR27bn in FY19e. The sharp swing in earnings is largely the effect of risk-adjusted NIMs reverting towards its mean to 2.1% (FY21e). Our read of the current stock of stress assets indicates that the bank is in the last leg of the credit cost cycle. And as levers of NIM expansion and growth plays out a definite trend of earnings normalization should emerge in coming quarters.”

One key highlight for SBI is that, case recovery from bankruptcy code. Analysts said, “Our high certainty of SBIN being in the last leg of provisioning cycle, is based on provisioning gap on current stress pool and estimated recoveries from cases referred to IBC. Also, as the newly-underwritten book bends more towards retail loans (40% of incremental), the credit cost should decline to ~1% by FY21e. This is likely to provide mega fillip to earnings with NNPL ratio coming off to ~2.2% by FY21e.”

Apart from this, SBI has also seen improvement in its domestic NIM  to 2.9% from 2.5% in 1QFY18. Analysts at Antique said, “ We believe there is more room for NIM expansion in the near term as low LD ratio (68%) moves higher and NNPLs decline. We had seen a similar phase in FY10-11, when 12% improvement in LD ratio over FY10-11 resulted in 130bps expansion in NIMs. However, as bank now focuses more on low risk assets and we build in 5% increase in LD ratio, we have factored ~25bps of NIM improvement over next five quarters.”

Further, SBI has maintained its' superior market share of 26% in household deposits and 27% in SA deposits throughout the cycle. Data given by Antique showed that, over the past one year, SBIN reported a 10 bps decline in cost of funds vs. 25-40 bps rise for stronger private lenders and 60-80 bps rise for players with relatively weaker liability franchise, giving it an advantage over pricing of loans. 

The bank which can defy the negative forces is a bank worth staying with. That said, largest lender State Bank of India (SBI) has seen their own level of shocks, and have proven its worth at various occasions. SBI led the way for the government’s merger agenda, by acquiring its six associate banks. Not only that, having the highest stressed asset, SBI has maintained its strong foothold and stability. In fact, the bank is moving towards stable gross NPA, turning losses into profits and good credit growth. On Thursday, SBI ended at Rs 314.70 per piece up by 1.12%. The bank has touched an intraday high and low of Rs 315 per piece and Rs 308.95 per piece on Sensex respectively. Interestingly, now is the right time to make buying in SBI, as an expert from Antique Stock Broking has given a buy rating with a target price of Rs 385 per piece. From the current level, SBI will make investors further richer, as it is expected to rise by over 22%. Sohail Halai and Amit Mishra analysts at Antique Stock Broking said, “We expect SBIN earnings to rebound to INR370bn by FY21e vs. INR27bn in FY19e. The sharp swing in earnings is largely the effect of risk-adjusted NIMs reverting towards its mean to 2.1% (FY21e). Our read of the current stock of stress assets indicates that the bank is in the last leg of the credit cost cycle. And as levers of NIM expansion and growth plays out a definite trend of earnings normalization should emerge in coming quarters.” One key highlight for SBI is that, case recovery from bankruptcy code. Analysts said, “Our high certainty of SBIN being in the last leg of provisioning cycle, is based on provisioning gap on current stress pool and estimated recoveries from cases referred to IBC. Also, as the newly-underwritten book bends more towards retail loans (40% of incremental), the credit cost should decline to ~1% by FY21e. This is likely to provide mega fillip to earnings with NNPL ratio coming off to ~2.2% by FY21e.” Apart from this, SBI has also seen improvement in its domestic NIM to 2.9% from 2.5% in 1QFY18. Analysts at Antique said, “ We believe there is more room for NIM expansion in the near term as low LD ratio (68%) moves higher and NNPLs decline. We had seen a similar phase in FY10-11, when 12% improvement in LD ratio over FY10-11 resulted in 130bps expansion in NIMs. However, as bank now focuses more on low risk assets and we build in 5% increase in LD ratio, we have factored ~25bps of NIM improvement over next five quarters.” Further, SBI has maintained its' superior market share of 26% in household deposits and 27% in SA deposits throughout the cycle. Data given by Antique showed that, over the past one year, SBIN reported a 10 bps decline in cost of funds vs. 25-40 bps rise for stronger private lenders and 60-80 bps rise for players with relatively weaker liability franchise, giving it an advantage over pricing of loans. Hence, the duo added, “We estimate SBIN's RoA to improve to 0.7% and 0.9% respectively by FY20-21e. We believe earnings enablers for SBIN are in place. The other concerns which are weighing on the valuations are: (1) Merger of weak bank with SBIN: we believe probability of this is low especially after we look at the recent capital infusion construct, (2) Bailing out/ funding to some of the NBFCs: The fear is not completely unfounded but its' impact on SBIN seems to be exaggerated given the balance-sheet size.” Also, with emerging investor's interest in some of these names, the probability of a big bail-out is declining. Therefore as the risk environment dissipate and comfort over earnings increase, analysts said, “we expect stock to re-rate. Maintain Top Pick.”
Hence, the duo added, “We estimate SBIN's RoA to improve to 0.7% and 0.9% respectively by FY20-21e. We believe earnings enablers for SBIN are in place. The other concerns which are weighing on the valuations are: (1) Merger of weak bank with SBIN: we believe probability of this is low especially after we look at the recent capital infusion construct, (2) Bailing out/ funding to some of the NBFCs: The fear is not completely unfounded but its' impact on SBIN seems to be exaggerated given the balance-sheet size.”

Also, with emerging investor's interest in some of these names, the probability of a big bail-out is declining. Therefore as the risk environment dissipate and comfort over earnings increase, analysts said, “we expect stock to re-rate. Maintain Top Pick.”