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YONO, earnings recovery key triggers for SBI: Goldman Sachs, Macquarie


State Bank of India (SBI) shares surpassed the Rs 300-mark on the BSE, surging 5.2 per cent in the intra-day session, and hit a high of Rs 308 on Wednesday. In the past two months, the stock of India’s largest public sector lender has leapfrogged 25 per cent at the bourses as against a 13.5 per cent rise in the benchmark S&P BSE Sensex. It took the stock nearly 65 trading sessions to jump from Rs 200 to Rs 300. It hit Rs 200-mark on October 14, on a closing basis.

The stock was the top performing stock on the Nifty bank index today, and supported the index to claim a fresh record high. In the intra-day session, Nifty Bank index touched fresh life-time high of 32,683.5 on the National Stock Exchange (NSE), soaring 100 per cent from March lows.

Foreign brokerage Goldman Sachs has added the stock to its ‘Conviction List’ and has revised its target upwards from Rs 367 to Rs 383, which translates to 31 per cent upside from Tuesday’s closing price.

“As the outlook on Indian macro improves, SBI remains one of the most attractive names within our coverage. Despite nearly 40 per cent increase in share prices in the last five months, investors are still pricing in around 60 per cent hit to its FY21E book value, which seems excessive. We believe not only does the bank have strong balance sheet protection, but there are other drivers that the market is yet to fully appreciate,” it said in its latest report.

The global firm believes that increasing confidence in earnings recovery; retail/digital focus driving sustained market share gains with long-term value creation potential; and compelling risk/reward makes the stock attractive. In their bull case scenario, they see a whopping 92 per cent upside (around Rs 560) from current levels while in a bear case could lead to a 5 per cent downside (around Rs 277).

Goldman Sachs notes that SBI’s retail positioning, which remains a strong growth driver, along with value unlocking potential from its digital app YONO, which could also be hived off into a separate subsidiary at some point per management, are key growth triggers. It expects YONO to be worth nearly $20 billion-$50 billion for SBI (1.2x-3x of SBI’s current standalone market cap).

Besides, examples of valuation re-rating driven by ROA improvement for financial stocks globally support sentiment. The brokerage has fine-tuned their earnings estimates and has raised its 12M SOTP-based target price to Rs383 (from Rs367), with 0.8x FY22E BVPS underpinning our target standalone valuation of Rs215/share and subsidiaries contributing the rest.

Another global brokerage Macquarie, on January 5, revised its target on SBI from Rs 308 to Rs 360 due to reduction in cost of equity by 100bp, resulting in increase in target multiple by 27 per cent to 0.74x.

Back home, Emkay Global Financial Services has a target price of Rs 340 on the stock on “undemanding valuation, stable liability profile, and expected sharp improvement in risk-adjusted returns”.

“Despite recent run up, when stripping off subs/investment value, SBI’s valuation is undemanding at 0.5x Dec’22E P/ABV. SBI’s long-standing & enviable liability profile, higher retail orientation among PSBs and expected sharp improvement in risk-adjusted returns (RoRWA), given renewed focus on profitability while maintaining market dominance, call for a re-rating. We raise FY21-23E EPS by 3-15 per cent on better growth/asset-quality expectations,” it said in a report dated January 3.

After unlocking, retail growth is swiftly moving toward pre-Covid level driven by home loans, in which SBI has a leadership position, and auto loans, where it has made deep inroads due to competitive rates.

“Factoring in better growth outlook, we are raising F22/23E credit growth estimate by 200 bps to 10 per cent/15 per cent. Management believes that ‘Digital’ is going to be the soul of future banking. It feels that SBI has a strong digital platform across asset/liability verticals to drive growth/fees, contain costs and improve core RoAs,” it added.

On the capital front, analysts at Emkay believe the bank remains largely self-funded, supported by improving core profitability and value unlocking in subsidiaries that are steadily gaining market share.

“The value accretion/unlocking in the subsidiaries should continue. So the bank will raise external equity capital only if it is available at favorable rates. The forced investment in YES Bank could also prove to be a blessing in disguise in the long run. Its profitable YONO digital platform, if carved separately, could be valued at Rs 29,500 crore (equals ~12 per cent of the bank’s current Mcap). We value subs/investments at Rs 1.33 trillion post holdco discount, contributing 44 per cent of Mcap at the TP,” it said.

Earnings expectation

Motilal Oswal Financial Services believes SBIN appears well-positioned to report a strong uptick in earnings as the uncertainty brought about by the pandemic has receded significantly. That said, the bank’s bottom-line figures could come under pressure.

MOFSL pegs the bank’s net profit at Rs 4,720 crore, while those at Edelweiss Securities see the PAT at Rs 3,830 crore. The lender has reported a profit of Rs 5,583.4 crore in Q3FY20. Asset quality is seen deteriorating with the gross NPA ratio (GNPA ratio) climbing to 6.3 per cent from 5.3 per cent QoQ, and NNPA ratio to 2 per cent from 1.6 per cent.


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