State Bank of India is the largest bank with a balance sheet size of over Rs. 52 lakh crore. The lender also has the most number of branches in India and ATMs. It also has several subsidiaries that provide allied services such as wealth management, broking and insurance. SBI has the best operating metrics in the public sector banking space. The bank is also known for its strength in its retail portfolio. Its large subsidiaries and strong outlook for them add value to the bank’s stock.
The SBI share price has performed well in recent months thanks to superior credit growth, improving net interest margins, rising returns on assets, and declining bad loan levels.Analysts at ICICIdirect believe the bank is firing on all cylinders. They have a ‘BUY’ rating on the stock with a target price of Rs. 750. They have valued the bank at 1.25 times FY25 expected adjusted book value and its subsidiaries at about Rs. 183 per share to arrive at a revised target price.
The following are key reasons why they believe so strongly about the SBI share price:
Credit growth, which is perhaps the most important and tracked metric for lenders, has sustained at elevated levels. In the quarter that ended in September, the company reported 20.8% year-on-yeargrowth in credit. SBI’s market share is broadly steady at 22.5% despite aggressive private banks snatching market share from other government-owned lenders.
SBI said its NIM is at a decadal high at 3.5%, supported by robust liabilities franchise. Though it is still a tad bit lower than some of its private peers, it is much higher than historic levels. Though, the company will likely not see such levels on a sustained basis. Analysts said on a steady state basis, they expect margins to stabilise around 3% during FY23-FY24.
Bad loans fall
Non-performing assets or bad loans as a percentage of total assets continue to fall. After touching a peak at 10.9% in FY18, asset quality concerns are receding with gross NPA at 3.5% in Q2FY23.Slippages – the incidence when a bank’s loan becomes an NPA – have also come down. During the Q2FY23, the bank’s slippages were almost a third of that reported during the previous quarters.
Meanwhile, recoveries and upgrades have picked up, resulting in better financial performance overall. It has also helped in improving the quality of the book.
It is the ratio of a bank’s capital to its risk. As per the rules, a bank has to keep capital adequacy above a certain level. Analysts noted that SBI’s capital position was robust with a capital adequacy ratio of 13.5%. It is higher than the mandated levels.