Analysts see up to 41% upside in SBI, BoB; credit growth to be key driver

Shares of State Bank of India (SBI) and Bank of Baroda (BoB) jumped 3 per cent and 9.7 per cent, respectively, in intra-day trade on Monday, and hit fresh record highs of Rs 547 and Rs 117 apiece

Shares of State Bank of India (SBI) and Bank of Baroda (BoB) jumped 3.5 per cent and 9.7 per cent, respectively, in intra-day trade on Monday, and hit highs of Rs 549 (record high) and Rs 117 (fresh 52-week high) apiece, after the public sector lenders reported strong December quarter results on Saturday. They, eventually, ended 0.5 per cent and 5.7 per cent higher at Rs 533 and Rs 113, respectively. In comparison, the benchmark S&P BSE Sensex settled 1.7 per cent lower. 

This has tempted analysts to upgrade target prices and earnings forecasts for coming years. They, now, see up to 40.7 per cent upside in SBI, and up to 37.2 per cent upside BoB's stock.

According to Prakhar Sharma, equity analyst at Jefferies, key positives for SBI in Q3FY22 were low net-slippages (gross NPLs down 3 per cent QoQ) and better loan growth (domestic loans up 6 per cent YoY).

The brokerage has tweaked its FY22-24 earnings per share (EPS) estimate by 4-8 per cent as they incorporate lower provision estimates. Potential macro-economic revival after Covid-19 headwind, along with improving asset quality, including receding stress in SME /mid corporate loans, will be the key catalysts for the stock, it said.

Country's largest lender, SBI, reported its highest quarterly net profit of Rs 8,432 crore in the third quarter ended December 31, 2021, up 63.2 per cent YoY. Net interest Income (NII) rose 6.48 per cent YoY to Rs 30,687 crore, and domestic net interest margin stood at 3.40 per cent, up six basis points YoY.

Gross non-performing assets (NPAs) was at 4.5 per cent (from 4.7 per cent YoY and 4.9 per cent QoQ), and net NPAs was at 1.34 per cent (from 1.23 per cent YoY and 1.52 per cent QoQ).

The lender's loan book expanded 8.5 per cent YoY with the corporate book expanding 4 per cent QoQ, and SME at 10 per cent QoQ.

"With SBI's focus on risk management during/after the stress cycle of FY15-18, asset quality performance is turning out to be best in class and low credit cost is driving upgrades (2-7 per cent over FY22-24). Now for return on asset (ROA) acceleration, growth and NIMs will be key levers where we are building gradual improvement and thus expect ROAs of 0.8 per cent-0.9 per cent over FY23/24 and return on equity (ROEs) of over 15 per cent," said Sohail Halai and Prabal Gandhi, analysts at Antique Stock Broking.

YES Securities is building an uptrend in NIMs going ahead as 49 per cent of loan book is linked to MCLR and 22 per cent is externally benchmarked, partly to treasury bill yield.

That said, the stock seems "reasonably valued" to brokerages but expect the improving credit growth and better return ratios to sustain the valuations.

"While SBI's valuations (core bank) have inched up to 1.0x FY24E BVPS given the steady improvement in asset quality and return profile, we believe that pick-up in credit growth can be the next trigger for incremental stock price performance," said JM Financial.

For Kotak Institutional Equities, valuations have enough room to sustain as there is a high probability that RoEs could surpass 15 per cent levels for the next few years, and as the bank has been able to defend its liability franchise.

As regards BoB, the lender reported a strong recovery in NII (up 14.4 per cent YoY at Rs 8,552 crore) and lower provisions even as lower treasury gains impacted other income. Domestic NIMs expanded 31bp QoQ to 3.2 per cent led by improvement in yields while cost of deposits continued to moderate.

Advances grew strongly at 5.5 per cent QoQ led by both corporate and retail books. CASA deposits too witnessed a strong traction.

The bank also reported a sharp improvement in asset quality ratios, with SMA 1/2 declining to 1.12 per cent of loans. Overall, Bank of Baroda's net profit doubled to Rs 2,197 crore.

Given this, Motilal Oswal Financial Services has raised its FY22E-24 earnings sharply by 11 per cent-13 per cent and estimate RoA/RoE of 1 per cent/14 per cent for FY24.

"We maintain ADD with a fair value of Rs 125, valuing the stock at 0.7X book and 6X FY2024E EPS for RoEs in the range of 15 per cent by FY24. FY22 would mark a second consecutive year of declining credit costs and we see this acting as a key investment driver for the medium," said Kotak Institutional Equities.

In our view, we are likely to see this falling below the long-term average for a few years given the weak corporate loan growth which implies that the risk of negative surprise is low. As the focus shifts to growth, the operating leverage will help expand return ratios, it added.