After a strong Q3, what’s next for SBI stock?

Credit growth of 8.5% was driven by retail loans, international loans and a resurgence of demand from small and medium enterprises (SMEs).

However, there was a slight decline in corporate lending, which remained at the same level in the year-ago quarter. Further, the Gross Non-Performing Asset (NPA) ratio increased from 4.77% in Q3FY21 to 4.50% in Q3FY22.

Not only this, the management of the bank is optimistic about the growth prospects. In the post-earnings conference call, management said that growth trends behind the pick up continue to show strong traction in most regions.

The pace of retail growth in products, especially home loans, continued. On the corporate side, management saw a strong trend in January, indicating a good performance in Q4.

The demand for trade finance loans in the overseas book has also been good. It also expects the slippage to remain stable around the current level of 0.37%.

While the management outlook on credit growth and asset quality is upbeat, a key metric that now needs to be improved is the return on equity (ROE). SBI’s ROE for the nine months ended December is 14 per cent.

“For the banking sector, RoE in the range of 15-20% is considered strong and indicates that the bank’s growth is sustainable. Hence, in this context, an improvement in ROE to the level of 15% would be a re-rating event for the stock as ROE gives a direct correlation to the profitability of the bank,” said Sizy Philippe, Senior Research Analyst, Axis Securities Ltd.

He added, “The bank’s commentary on credit growth and asset quality is positive and its commitment to ROE is a boost for the stock, simply because when it comes to talking about ROE, many PSU banks are like this. don’t share the faith.”

SBI Management is committed to deliver 15% ROE on an ongoing basis, and is likely to be aided by increased credit growth, normalization of credit cost and improvement in operational performance.

Expressing similar opinion, Nitin Agarwal, Senior Group Vice President, Research-Banking Sector, Institutional Equities, Motilal Oswal Financial Services Ltd said: “SBI used to generate 15% ROE in normal years and hence they take it a good mile. See it as a stone. Reach.”

To be sure, SBI shares have outperformed the Bank Nifty index over the past one year, indicating that investors have noted improvement in various performance metrics.

To that extent, valuations have gone up. Still, any disappointment on asset quality or a slowdown in credit growth would be a major downside risk to the stock.

The country’s largest lender could benefit from a boost to infrastructure in the recently announced budget. But analysts at HDFC Securities said in a report, “The recently announced fundamentals-focused Union Budget has provided SBI with significant space to gain market share in the corporate portfolio; however, since it is the largest Indian bank, We argue that it may be too under-capitalised to participate in the capital expenditure cycle.”

For now, analysts are upbeat. For example, the fair value of Kotak Institutional Equities for SBI stock is 700, its valuation is at 1.5 times (adjusted) book and nine times FY2024E earnings per share in the range of 15% to ROE.

SBI shares closed with marginal gains on Monday 533.25.