Money Management

Brokerages turn bullish on SBI due to attractive valuation; see 20-44% on the rise

India’s largest state bank, State Bank of India (SBI), has seen back-to-back upgrades by brokerage houses, both foreign and domestic.

An attractive valuation relative to private peers, improving financial sector, and timely support from the government and the Reserve Bank of India (RBI) in the wake of the Covid-19 pandemic boost the confidence of analysts, outside impressive figures for the June quarter (Q1FY21).

Since its recent low of Rs 150.85 a coin on May 22, the stock is up 49% on BSE, compared to a 28.67% gain in the benchmark S&P BSE Sensex until Friday, according to reports. data. And there is still steam, brokers believe. From the current price of around Rs 220, the one-year return could vary between 15% and 38% according to brokerage estimates.

Seen as an indicator of improving confidence in the financial sector, Goldman Sachs noted in a recent report that the current valuation of SBI shares (0.2 times the book value per share for fiscal year 21E) constitutes a attractive entry point. “In our bullish scenario, if the growth trajectory improves and asset quality turns out to be better than expected, the stock could still be revalued to 0.7x FY21E BVPS, which implies a rise of 70% by compared to current prices, ”the report says.

READ ALSO: Bank stocks recover on better earnings prospects; room upside down

UBS analysts, meanwhile, said in a report that the SBI is trading at a historically low valuation (0.3x FY21E P / BV), noting that most of the negatives are factored in. The second trigger, analysts say, is the lender’s reduced involvement in YES Bank. The private lender recently raised Rs 15,000 crore via a follow-up public offering which, Goldman Sachs noted, reduced SBI’s stake in the bank from 48% to 30%, thereby eliminating tail risk.

“With YES Bank slowly showing signs of recovery, the risk of holding a struggling lender is now over,” CLSA said in an Aug. 20 report.

The other factor of optimism is the result of the bank in the first quarter.

The bank recorded an 81.18% increase in net profit to Rs 4,189.34 crore, from Rs 2,312.2 crore a year ago. Its pre-tax profit rose 36.8 cents to Rs.5,559.7 crore in the first quarter.

In addition, its total term loans under moratorium stood at 9.5% in the first quarter compared to 23% at the end of the March quarter. This, coupled with Covid-related arrangements of around Rs 3,000 crore and a lower Special Mention Account Book (SMA), reassure analysts.

“A comfortable provision coverage ratio (PCR) of 71% in the first quarter of fiscal 21 bodes well for the bank. Adjusted for loans under moratorium, the PCR is 45%, which is one of the highest in our coverage universe, ”said the Goldman Sachs report.

ALSO READ: Covid-19: Delhi hotel revenues fell 44.3% from January to July, according to JLL

Analysts believe the SBI is best suited to reflect the economic recovery. National brokerage JM Financial observes that the thesis that the SBI share price follows the overall national economic trajectory continues to unfold and that the return to normal could be reflected in higher valuations of SBI.

Unrealized opportunity that the bank has thanks to the monetization of its subsidiaries and the fact that SBI has been able to maintain its market share in retail assets, current accounts and savings accounts (CASA), global loans and deposits over the past decade despite fierce competition from private players are some of the other bright spots for analysts that have made them bullish on the stock.

Dear reader,

Business Standard has always strived to provide up-to-date information and commentary on developments that matter to you and have broader political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering has only strengthened our resolve and commitment to these ideals. Even in these difficult times resulting from Covid-19, we remain committed to keeping you informed and updated with credible news, authoritative views and cutting-edge commentary on relevant current issues.
However, we have a demand.

As we fight the economic impact of the pandemic, we need your support even more so that we can continue to provide you with more quality content. Our subscription model has received an encouraging response from many of you who have subscribed to our online content. More subscriptions to our online content can only help us achieve the goals of providing you with even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practice the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital editor