Buy State Bank of India shares for up to 32% rally, brokerages expect robust earnings growth

State Bank of India’s share price could be in for a strong rally led by strong earnings and improving balance sheet.

The lender has improved its asset quality during the last few quarters.

State Bank of India’s share price could be in for a strong rally led by strong earnings and improving balance sheet, analysts at domestic brokerage firm Motilal Oswal said. “SBI appears well-positioned to report a strong earnings uptick, led by moderation in credit costs, as the bank has strengthened its balance sheet and increased its PCR to ~88%,” analysts at Motilal Oswal said in a note. State Bank of India is the country’s largest public-sector lender. SBI’s share price has zoomed more than 13% since the end of December to date. The pinned target price of Rs 675 apiece implies another 32% upside potential.

Improving fundamentals

The lender has improved its asset quality during the last few quarters. During the first quarter of the previous fiscal year, SBI’s gross NPA stood at 5.4%, the same was down to 4.9% last quarter. The bank has been reporting continued improvement in earnings, helped by controlled provisions. “SBI inarguably has one of the best liability franchises (CASA mix: ~46%). This puts it in a better position to manage yield pressure. Moreover, low cost of deposits would continue to support margins, to a large extent. We estimate FY23E RoA/RoE of 0.8%/15.1%,” Motilal Oswal said. 

State Bank of India’s subsidiaries such as SBI Mutual Funds, SBI Life Insurance, SBI Cards, and Payment Services, and SBI Cap — have exhibited robust performances in the last few years and account for nearly 31% of the total valuation. 

While Motilal Oswal sees a strong 32% upside for SBI, analysts at Edelweiss are also bullish on the stock. The brokerage firm has picked State Bank of India as one of its top picks in the banking space ahead of the quarterly results. The brokerage firm has a ‘buy’ rating on the scrip with a target price of Rs 650 per share.

Results preview

In the October-December quarter, SBI is expected to report a loan growth of 6.7% on-year to Rs 26.1 lakh crore and deposits at 9% on-year basis, said ICICI Direct. The brokerage firm GNPA ratio of SBI may come down to 4.68%, factoring in normalized slippages at Rs 6000-7000 crore. ICICI Direct anticipates SBI’s Net profit to rise 50% on-year basis to Rs 6,919 crore. ICICI Direct has a ‘Buy’ rating on SBI with a target price of Rs 640 per share.

JM Financial, on the other hand, has more robust earnings expectations from State Bank of India. JM Financial expects the lender to report a 74.4% on-year growth in net profit to Rs 9,064 crore while loans are expected to grow 6.3% on year and deposits at 8.8%.

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