Bank fixed deposits have been an ideal saving and investment instrument for investors looking for regular and steady income with minimum risk. However, there are better options.
Bank fixed deposits (FDs) have been an ideal saving and investment instrument for investors looking for regular and steady income with minimum risk. Although in terms of returns, FDs have become a bit unattractive over the last few years as interest rates have dipped considerably, still a large number of people – particularly senior citizens and risk-averse investors – prefer to park their money in bank FDs for a variety of reasons. Compared to many other banks’ FDs, the State Bank of India’s FDs are hugely popular among investors, may be because it is also India’s largest bank and also the most trusted one. However, if you are one of those who are looking to invest in SBI but want better returns, then instead of FDs you should look for some other options.
According to market experts, investing in the stocks of SBI and some other banks may be one such option, which may give you better returns not only in the short term, but also in the medium to long term. Although it is not fair to compare FDs with stocks as they are different products and are meant for investors with different risk profiles, however, it is also a fact that in the current market scenario decent returns are not possible without taking any risk.
Abhimanyu Sofat, Head of Research, IIFL, says, “Fixed deposit is an investment plan where you invest a sum of money in a bank for a specified period with a pre-defined rate of interest. This is one of the most common investment approaches among the public, due to the low risk it carries. FDs are the most risk-free investment you can make. Your money grows at a steady rate and there is zero fluctuation. However, compared to other investment options, FDs give low returns.”
For instance, you can get returns ranging from 5% to 7.5% on 1 to 5-year bank FDs currently. However, if you invest in the stocks of, say, SBI, then you may get 4 to 5 times more returns in one year itself. Lots of brokerage houses, including Samco Securities and IIFL, are currently bullish on SBI. For example, while IIFL’s one-year target price of the SBI stock is Rs 320, Samco Securities expects the stock to reach the level of Rs 340 in the next 12 months, implying a return of 28% as currently SBI is trading at around Rs 265. IIFL’s 5-year target price of SBI is Rs 600. If the stock reaches this level, then your money will more than double in 5 years. However, this is also subject to market risks.
Why is SBI expected to do well despite its largest quarterly loss?
Market experts say that the past six months have been tough for a large number of PSBs with stocks plunging by 30-60% as compared to the Sensex having a bull run. Recently, SBI reported its largest quarterly loss of Rs 7,718 crore for Q4FY18 largely due to the rise in provisions for stressed assets and mark-to-market losses. The RBI’s Feb 12 circular related to stressed assets recognition framework has accelerated the process of NPA recognition and resulted in the rise in bad loans and provisions during the last quarter. The surge in slippages pushed the GNPA ratio to 10.91%.
However, “we are optimistic about its future considering the recent resolution of the Bhushan Steel Ltd case by the NCLT under the IBC provisions, resulting in the recovery of around Rs 10000 crore by SBI. More of such resolutions are expected in the current financial year to improve the asset quality with SBI being the biggest lender. So comparing it to an investment in FD is not fair considering the low return of 8-9%, which is taxable and is not sufficient to beat the inflation,” says Jimeet Modi, Founder & CEO, Samco Securities and StockNote.
The SBI chief, in fact, has himself suggested that the worst phase of the bank is over and most of the NPAs have been recognized. He also shared the guidance for the various metrics till FY20 reflecting the confidence in the business. The bank is aiming to achieve a credit growth of 10% in the current financial year and 12% by March 2020 from the current level of 4.91%. The decrease in credit cost to less than 1.1% and the growth in loan book will push up the Net Interest Margin to above 3%. The healthy Provision Coverage Ratio of 66% is expected to help write-back of provisions in case of a lower haircut from resolved NPAs. The bank also plans to bring the GNPA ratio down by 45% to below 6% level and NNPA ratio to below 2.3% level. It will be achieved under a specialized vertical with stressed assets specialized hired to improve the asset quality.
“We expect the market to absorb such a positive outlook and reflect in a price increase of the stock to reach the level of Rs 340 in the next 12 months. An investor with a higher risk appetite can look at the basket of PSBs such as Allahabad Bank, PNB and Canara Bank, which are available at an attractive valuation and are expected to follow a similar recovery path as SBI,” says Modi.
Sofat of IIFL says that the cost of deposits for the State Bank of India as of March FY18-end stood at 5.3%. Although it’s risk-free, the earnings are mediocre at best. Relatively, buying the stock of SBI would make you earn handsome return over 1-5 years’ time-frame. “The stock at the current market price is trading very attractively at ~1x FY20E P/BV. The management of the bank has guided for lower slippages and higher return ratios besides focusing on loan growth and retail segment. Further, the government re-capitalization programme and recovery in return ratios would re-rate the stock in the coming period. So, even if the bank fetches 1.5 multiple, it would offer ~50% return over the next 2-3 years. Thus, we feel that buying the SBI stock would reward more than parking your money in FDs,” he says.
(Disclaimer: FDs are meant for risk-averse investors, while stocks carry market risks. So, if you want to invest in the stock of any bank or company based on these recommendations, then do it only after consulting your financial advisor)