Brokerages Remain Optimistic On SBI As Asset Quality Improves

Brokerage houses retained their rating on India’s largest lender State Bank of India (SBI), after it reported better-than-expected January-March earnings on Friday. Most brokerages also retained or hiked their price targets on the stock.

As a ratio of total advances, gross non performing assets (NPAs) for the reported period stood at 6.9 percent, compared with 7.23 percent in the October-December, 2016 period. In absolute terms, gross bad loans rose 3.9 percent quarter-on-quarter.

Morgan Stanley increased its price target on State Bank of India Ltd. (SBI) by the largest quantum of 32 percent, and said the bulk of the increase was driven by its non-banking businesses. However, most analysts expect the lender’s credit costs to rise from slippages arising out of the balance sheet clean-up of associate banks.

Here’s what brokerages said about SBI post its earnings:

Deutsche Bank

• Rating: Buy
• Price Target: Raised to Rs 345 from Rs 310

• Subsidiaries’ below-par asset quality is now recognised.
• Believe SBI is conservative in recognition; conservative provisioning to aid future profits.
• Expect an improving slippage ratio (2 percent in FY19 vs. 5.9 percent in FY17), lower credit ratio and improving core trends with a higher CASA ratio and steady NIM (net interest margin).

Morgan Stanley

• Rating: Underweight
• Price Target: Raised to Rs 245 from Rs 185

• SBI posted a loss on a consolidated basis given continued clean-up at associate banks.
• FY18 to be affected by weaker revenue and high credit costs.
• Expect bank’s return on equity (ROE) to remain at 5-6 percent for the next 2 years, driven by revenue weakness and high credit costs.
• Strong performance of its subsidiaries was the primary driver of hike in price target; bulk of the increase in the price target is driven by non-bank (life insurance, credit cards, mutual funds and capital markets) businesses.

BNP Paribas

• Rating: Buy
• Price Target: Unchanged at Rs 353

• Long-term structural story intact.
• Elevated provisions and renewed watchlist likely to keep FY18 in check.
• Potential long-term share price drivers are still in place: a solid liability franchise, dominant position in digital banking and a strong balance sheet (Tier-1 ratio of 10.35 percent).

Nomura

• Rating: Buy
• Price Target: Rs 330

• Standalone performance of the bank was in line with estimates.
• Associate banks had slippages of 4.5 percent leading to cumulative net slippage of 15 percent of loans in FY17, which is a negative surprise.
• Expect asset quality of associate banks to come as a negative surprise; estimate associate banks’ total stress including FY17 writeoffs at 22 percent of loans versus SBI’s 11 percent.
• Expect FY19 to normalise in terms of credit cost.
• Prefer ICICI Bank among corporate banks.