SBI shares jump 10% as brokerages retain buy call on likely healthy growth in FY21

State Bank of India

Shares of State Bank of India climbed 10 percent intraday on October 31 after brokerage houses had retained their bullish stance on the stock as the management expects slippages to moderate from the next financial year 2020-2021.

The stock rallied 22 percent in last 15 days. It was quoting at Rs 312.60, up Rs 22.65, or 7.81 percent on the BSE at 1516 hours IST. In fact, the sentiment was also buoyed after strong earnings report last week.

Global brokerage house CLSA maintained its buy call on the stock with a target price at Rs 390 per share, implying 34.5 percent potential upside from current levels.

SBI on October 30 hosted Investor Day to showcase its restructured business/stress management verticals, future business strategy, including cross-selling opportunity, and underlying value in cards/insurance/AMC businesses, thereby claiming better valuations.

The management expects slippages to moderate from FY21 and said FY20 would see higher slippages, especially as large cases such as DHFL default.

Management sees slippage ratio falling below 2 percent in the current financial year and expects less than 1.3 percent for FY21 against 1.6 percent in FY19.

“Corporate slippages are seen around Rs 22,000 crore in FY20 and Rs 12,000 crore in FY21 against Rs 10,244 crore in FY19 while retail slippages in FY20 are seen around Rs 24,000 crore and Rs 20,000 crore in FY21 against Rs 22,494 crore in FY19,” the bank said.

“Company is gaining share without having to offer high rates. Digital platforms are ahead of peers, with plans to extend them beyond retail. We believe SBI will see earnings recovery from FY20,” said the brokerage, adding SBI remained its top PSU bank pick.

Emkay also maintained its buy/overweight call on the stock in its Emkay Alpha Portfolio with target price at Rs 350 (implying 21 percent potential upside from current levels), given bank’s enviable franchisee, strong retailization/digitization, healthy capital and strong subsidiaries value.

However, near-term stock performance will track the outcome of corporate NPA recognition/resolutions, it said.

The bank now guided for 0.4-0.5 percent return on asset (RoA) in FY20 versus 0.75 percent earlier, factoring in higher LLP. It remained highly focused on improving its core operating profit & reaching RoAs towards 1.0 percent by end of FY21.

Emkay prefers to be conservative with the RoA estimate of 0.4 percent/0.6 percent in FY20/FY21, mainly factoring in higher LLP given continued lumpy corporate stress.

“No merger (voluntary/involuntary) in pipeline with bank/NBFC given its already high market share. Life, MF and Cards subsidiaries have gained sizeable market share and expects value unlocking via IPO in cards by January 2020,” said the brokerage.

Prabhudas Lilladher said key enablers would be (i) improving NIMs from lower cost of funds, lower interest reversals and risk based pricing on loans (ii) steadying fee income generation & operating expenses control below 10 percent or cost-to-income ratio of 45 percent (from current 50-55 percent) and (iii) having the credit cost of lower than 100bps with slippages of 1.5 percent assuming LGDs of 50-60 percent in base line scenario.

According to the brokerage, the bank’s baseline scenario of pre-provision operating profit Rs 65,000 crore and Rs 75,000 crore in FY20/FY21 can be achievable.

“But we vary on RoAs of 0.9-1.0 percent by FY21 as timing of provisions on new stressed assets will have to be upfront & write-back from recoveries can be delayed despite large cushion available,” said the brokerage which retained buy rating with a revised target price of Rs 413-implying 42.4 percent potential upside from current levels (from Rs 396) – as it slightly increased valuations in subsidiaries with bank estimates unchanged.

The bank sees the provision coverage ratio improving to 84 percent in 2019 and further to 88 percent in 2020 against 78.73 percent in FY19. It expects the credit cost lower than 1.80 percent in the current financial year and less than 1 percent in FY21 against 2.66 percent in the previous year.

News Source:- Moneycontrol

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