The State Bank of India (SBI) deceleration in gross NPA, profits against losses and better than expected financial performance in Q4FY19 have made the lender an appealing stock on Dalal Street. The share price of SBI has jumped by over 2% on Sensex, after the bank touched an intraday high of Rs 314.40 per piece compared to previous trading session. Although at around 1244 hours, SBI was trading at Rs 309.95 per piece up by 0.62% on the same index. In its Q4FY19, SBI booked profit of Rs 838 crore against losses of Rs 7,718 crore a year ago same period. SBI is turning around after the shocks of the merger, and in fact, its gross NPAs slipped by 338 basis points on yearly basis to 7.53%. Apart from this SBI also saw rise of 14.92% year-on-year in Q4FY19, due to growth in domestic Credit, improved Spreads and lower Slippages. Experts are optimistic and have given buy rating. Not only that, SBI is likely to help investors money grow, even if they buy the shares now. Let’s find out what experts have said!

Reliance Securities:

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Mona Khetan and D. Vijiya Rao, Research Analysts said, “SBI’s strong liability franchise and better capital position differentiate it from other PSU peers. Moreover, industry best cost of funds also helps lower asset side risks. Upwardly revising our earnings estimates by 15%/18% for FY20E/21E owing to moderation in credit costs and lower slippages, we maintain our BUY recommendation on the stock with a revised Target Price of Rs390 (from Rs370 earlier), based on 1.4x FY21E adjusted PBV and the value of its subsidiaries, implying a FY21 P/ABV of 1.6x.”

Elara Capital:

Rakesh Kumar and Chintan Shah analysts here said, “Core operating performance is expected to improve in FY20E. NPL recovery in IBC cases and gains from subsidiaries stake sale would push return ratios in FY20. We expect an ROA of 60bp in FY20E and 80bp in FY21E. We reiterate Accumulate with revised TP of INR 352 from INR 332 and determine SBI (standalone banking entity) value at INR 274 from INR 257 at 1.3x (unchanged) one-year forward P/ABV and INR 78 (from INR 75) towards key subsidiaries.”

Kotak Institutional Equities:

M B Mahesh, Nischint Chawathe and Dipanjan Ghosh analysts at Kotak added, “SBI reported a stellar quarter on asset quality with slippages at ~1.5% of loans, gross and net NPLs declining 100-120 bps qoq and provision coverage ratio improving ~500 bps to 62%. Total SMA 1 and 2 is 0.4% of loans, suggesting negligible residual risk. With negligible balance sheet risk, we believe that the bank is well-positioned to deliver strong earnings growth for FY2020- 21, which could see RoAs moving closer to 1%.”

Therefore the trio said, “We maintain BUY rating on SBI with a fair value of Rs 410 (unchanged), valuing the bank at 1.2X book and 7X March 2021E EPS for RoEs in the range of ~15% in the medium term. Our broad thesis on the bank remains unchanged and it stays our preferred idea among public banks. We believe that the bank is well-poised to show sharp improvement in return ratios by FY2020 on the back of recovery in loan growth, healthy operating profit growth and sharp reduction in credit costs.’’

Yes Securities:

With every passing quarter, SBI is getting more sanguine about its growth and profitability prospects. The deepening NBFC/HFC crises implies potential growth opportunities and asset quality challenges for banks in general. For SBI, the benefit from market share could easily outweigh any potential stress in its NBFC/HFCs portfolio, which we believe would be quite manageable, Yes Securities indicated. 

Slippages are expected to remain moderate with legacy stress recognized and fresh NPL accruals remaining low underpinned by tightened underwriting and monitoring, shift towards cash flow based lending and shift towards better rated assets. Credit cost is expected to be substantially lower in FY20 with requirement of minimal incremental provisioning on legacy stress and resolutions of NPLs leading to substantial provisions write-backs, Thus, the bank expects RoA in FY20 to be in the range of 0.75% to 1.05% capturing the worst and best scenario. 

Research Analysts namely Rajiv Mehta and Sachit Damani, along with Head of Research Amar Ambani said, “The subsidiaries in life insurance, general insurance, asset management and cards continue to accrete value. Adjusted for the value residing in them as per the holding, the stand-alone bank trades at an undemanding valuation of 6x P/E and <1x P/ABV on our FY21 estimates. The valuation gap with Axis and ICICI Bank has significantly widened over the past 6-8 months, and thus SBI offers the best risk-reward amongst the corporate lenders. SBI now is our top pick in the sector.”

A target price of Rs 425 is set on SBI by Yes Securities. 

Key highlights of Q4FY19:

Net NPA Ratio at 3.01% down 272 bps YoY and 94 bps sequentially. Provision Coverage Ratio improved significantly by 1256 bps from 66.17% as on March 2018 to 78.73% as on March 2019. Slippage Ratio at 1.39% in Q4FY19 (down 561 bps YoY) & 1.60% in FY19 (down 325 bps YoY). 

Net Interest Margin rose to  3.02% in Q4FY19. Robust Domestic Credit Growth at 13.99% YoY is driven by both Retail-Per (18.52% YoY Gr) as well as High Rated Corporates (14.83% YoY Gr). Home Loan Portfolio crossed Rs. 4 Lakhs crores as on March 2019.