Brokerage firm Sharekhan is bullish on the shares of State Bank of India (SBI) with a target price of Rs 315. On Tuesday, shares of the public sector lender were trading at Rs 259.25. The brokerage house recently met with the management of SBI to understand the business environment in the domestic banking industry and the bank. For the quarter ended June 30, 2016, the bank reported a standalone net profit of Rs 2,520.96 crore, down 31.73 per cent, against Rs 3,692.43 crore in the corresponding quarter a year ago. However, total income of the bank increased by 9.38 per cent year-on-year to Rs 48,928.60 crore for the quarter under review.
Below are five points why Sharekhan is bullish on State Bank of India:
1) The grant of one-year extension to Arundhati Bhattacharya as chairman of SBI will be positive for the bank, providing it benefits from continuity in the leadership. Under Bhattacharya, the bank had strengthened credit-monitoring measures, processes to identify possible defaults and steps to recover/manage them.
2) The bank has also improved operational efficiencies (with cost-to-income ratio shrinking by 350 basis points during last two years). Sharekhan believes that her leadership will be a crucial advantage for SBI in order to smoothly execute the merger with its associate banks.
3) The Reserve Bank of India’s (RBI) Order Books, Inventories and Capacity Utilisation Survey (OBICUS) for Q4FY2016 revealed slight pick-up in order books, with aggregate Capacity Utilisation (CU) at 74.1 per cent seeing a sequential traction (partly seasonal) but flat YoY. However, the SBI management indicates that their on-ground experience is better and capacity utilisations, though weak, are improving gradually.
4) SBI sees improving credit growth on the back of the economic recovery and softening interest rates. SBI has guided for a credit growth of 12-13 per cent for FY2017E, up from the 12 per cent projected at the start of the fiscal year. It has indicated that sectors like roads, renewable energy, telecom and NBFCs are among the key growth drivers in the corporate segment. SBI’s SME and Retail focus will also continue to witness good traction. Net interest margins are expected to be maintained at current levels, as falling yields will be offset by reduction in cost of funds. Incrementally, booking of treasury profits will help offset provision pressure in the near term.
5) The recent Rs 7,575 crore capital infusion is expected to offset any adverse impact of losses at subsidiaries on its Q1FY2017-end CET-1 of 10.71 per cent. Its low Return on Equity (RoE) (7.3 per cent in FY2016) can improve once the credit demand picks up pace. The bank is the largest and arguably the best managed Public Sector Bank (PSB), which is evident from its high penetration in the retail segment, progress on digital banking etc. SBI’s 74 per cent stake in SBI Life Insurance can be value accretive for the parent once it is listed. Its 1.6x FY2018E ABV (standalone), and improving fundamentals look positive. The brokerage house maintains ‘Buy’ rating with a revised price target of Rs 315.