State Bank of India Ltd’s (SBI’s) shares touched a new 52-week high of ₹549 on the NSE on Monday. Investors were pleased with the bank’s robust December quarter (Q3FY22) performance. Among the key positives of Q3 earnings were strong retail loan growth despite the ongoing covid-19 pandemic, a 17% year-on-year (y-o-y) drop in provisions and improving asset quality.
Loan growth of 8.5% y-o-y was driven by retail loans, international loans and a resurgence of demand from small and medium enterprises (SMEs).
However, corporate lending was a tad underwhelming, remaining at the same levels as the year-ago quarter. Furthermore, the gross non-performing asset (NPA) ratio improved from 4.77% in Q3FY21 to 4.50% in Q3FY22.
What’s more, the bank’s management is optimistic about its growth prospects. In a post-earnings conference call, the management said growth trends continue to show strong traction on the back of a pick up across most segments.
Retail growth momentum continued across products, especially home loans. On the corporate side, the management witnessed strong trends in January, hinting at a good performance in Q4.
Demand for trade finance loans in the overseas book has also been decent. It also expects slippages to stay stable around current levels of 0.37%.
While the management outlook on loan growth and asset quality is upbeat, a key metric that now needs to improve is the return on equity (RoE). SBI’s RoE for the nine months ended December is at 14%.
“For the banking sector, RoE in the range of 15-20% is considered robust and indicates that the bank’s growth is sustainable. So, in this context, improvement in RoE to 15% levels will be a re-rating event for the stock because RoE gives a direct correlation to the bank’s profitability.” said Siji Philip, senior research analyst, Axis Securities Ltd.
“The bank’s commentary on loan growth and asset quality is positive and its commitment to RoE is a boost for the stock, simply because not many PSU banks share such confidence when it comes to talking about RoE,” she added.
The SBI management remains committed to deliver 15% RoE on a sustained basis, and is likely to be aided by increasing credit growth, normalization of credit cost and improving operational performance.
Echoing similar view, Nitin Aggarwal, senior group vice president, research-banking sector, institutional equities, Motilal Oswal Financial Services Ltd, said: “SBI used to make 15% RoE in normal years and that’s why they see it as a good milestone to reach.”
To be sure, shares of SBI have materially outperformed the Bank Nifty index in the past one year, suggesting investors have noted the improvement in various performance metrics.
To that extent, valuations have inched up. Even so, any disappointment on the asset quality or slowdown in loan growth will be a key downside risk for the stock.
Infrastructure boost in the recently announced budget could favour the country’s largest lender. But analysts at HDFC Securities said in a report, “The recently announced infra-focused Union budget offers SBI significant room to gain market share in the corporate portfolio; however, as it is the largest Indian bank, we argue that it may be too thinly capitalized to partake in the capex cycle.”
For now, analysts remain upbeat. For instance, Kotak Institutional Equities’ fair value for the SBI stock is ₹700, valuing it at 1.5 times (adjusted) book and nine times FY2024E earnings per share for RoEs in the range of 15%.
On Monday, SBI’s shares closed slightly higher at ₹533.25.
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