SBI Stock Hits A Record High After Morgan Stanley Raises Target

Shares of State Bank of India jumped to a record high after Morgan Stanley raised its price target on the nation’s largest lender saying it’s best placed in the turning macro cycle, along with an improved retail franchise.

The global financial services provider, according to its note released on Thursday, raised its price target on SBI’s stock to Rs 600 apiece from Rs 525, implying a potential upside of 46% from Wednesday’s closing price. For its bull case scenario, however, Morgan Stanley expects a potential upside of close to 90% with a price target of Rs 765 apiece.

“Its [SBI’s] retail franchise has improved, and the corporate cycle is turning, we see a material upside risk,” the note said. “As the corporate cycle turns, we expect earnings estimate upgrades and significant rerating.”

Morgan Stanley sees upside risks to SBI’s earnings on:

• Higher margins as excess liquidity decreases and rates move higher.
• Lower cost to income ratio as wage hike cycle has ended and rate cycle is turning, which can drive slower cost growth.
• Lower credit costs, helped by moderation in corporate non-performing loans and lumpy recoveries.

Morgan Stanley tries to draw a parallel to the recovery cycle seen in India during the early 2000s. “That cycle brought about a sharp outperformance by banks, with returns more than five times between FY02 and FY07,” it said. While large private banks are well placed to benefit in the current cycle, the research firm expects SBI to stand out. “It has a much better balance sheet and profitability and is well placed to improve earnings as the cycle turns,” the note said. “Against this backdrop, the stock can rerate sharply and present a significant upside.”

Morgan Stanley’s bull case:

• Price target of Rs 765 apiece.
• Strong V-shaped economic recovery resulting in better revenue growth.
• Strong improvement in operating leverage.
• Loan growth improves sharply, owing to a sharp pick-up in the macro climate.
• Higher-than-expected benefits from digitization.
• Margin to expand in FY22, helped by an increase in the share of high yielding loans.
• Asset quality trends are better than expected, driving higher upgrades / recoveries and quick moderation in credit cost.

This came a couple of weeks after SBI reported its results for the quarter ended December. Its net profit fell but core income rose. The lender’s proforma gross NPA—not classified as bad loans after the Supreme Court’s interim order in the interest-on-interest case—stood at 5.44% compared with 5.88% in the three months ended September.

“Consequently, SBI’s corporate/retail loan book, which is 65% of the overall loans, has the potential to surprise positively over the next two years,” Dinesh Kumar Khara, chairman at SBI, had said after announcing the results. “Our provision coverage ratio is more than 90% so we do not expect any large provisions to be made against these assets in the future.”

The state-owned bank, according to Khara, also aims to control its credit costs this year, well below the 2% guidance offered previously. “Total stressed assets, which is slippages added with restructured accounts, will remain below Rs 60,000 crore this year.”

Shares of SBI gained as much as 3.9% in early trade on Thursday to a record high of Rs 427.7 apiece. The stock has gained in four of the last five trading sessions. It was the second-best performers on the Nifty 50 in January 2021 and so far in February, gaining more than 50%—most of which came after the Union Budget speech on Feb. 1.

Of the 49 analysts tracking SBI, 47 recommend a ‘buy’, while two suggest a ‘sell’, according to Bloomberg data. The average of 12-month consensus price target implies an upside of 8.7%.