SBI shares have, so far, not managed to recoup March losses on Dalal Street unlike large private sector peers.
India’s largest PSU bank, State Bank of India’s (SBI) share price has surged over 6% since last week as financials mounted a strong comeback on Dalal Street. SBI found CLSA backing its fundamentals at the end of last week and this week it is global brokerage and research firm Goldman Sachs terming the lender as the best proxy on improving confidence in the financial sector. SBI shares have, so far, not managed to recoup March losses on Dalal Street unlike large private sector peers. Goldman Sachs has raised its 12-month target price by 54% to Rs 282 per share.
With the banking sector having raised a total of $20 billion, Goldman Sachs in its report said, it is an indication of the improving confidence in the financial sector’s stability. The improving credit spreads for non-bank financial institutions has also been worked out by the brokerage firm. “While concerns on the ALM position of NBFCs due to high-levels of moratorium remain, the policies have been supportive and reduce meaningful risk for SBI to intervene,” it said. The Rs 15,000 crore capital raising exercise of Yes Bank, is a positive for SBI which now only has 30% stake in the private lender. “We believe this takes away the tail risk of SBI needing to increase its involvement in Yes bank or any other financial lender that might be undergoing stress,” Goldman Sachs said.
Although with the coronavirus pandemic wreaking havoc, Goldman Sachs does expect higher levels of slippages at close to 4%, SBI’s high provisions offset the risk to a certain level. Provisions on overall stressed loans, including moratorium & overdue loans at the end of the April-June quarter for SBI stood at 33%, which is more than ICICI Bank, Axis Bank, and even HDFC Bank. To add to that SBI has just 9.5% of its loans under moratorium at the end of the previous quarter.
The report adds that SBI is expected to deliver operating profit growth of close to 9% this fiscal and the next one, driven by one of the lowest cost of funds across the system. “We feel the bank’s profitability is relatively better cushioned from any deterioration in asset quality that should heighten the need for accelerated provisions,” the report said. Along with the increased target price, Goldman Sachs has also raised their EPS estimates by 34%.
Goldman Sachs, further added that SBI which is currently trading at 0.2x FY21 BVPS appears compelling on the back of reducing tail risks from Yes Bank, better balance sheet, and steep discount to ICICI Bank and Axis Bank valuations. “In our bull case scenario, if the growth trajectory improves and asset quality turns out better than our expectations, we believe the stock could further re-rate to 0.7x FY21E valuations, implying an upside of 70% to current market price, the report said.