has moved up over 25 per cent in the last four months but still trades below an undemanding 0.5x FY22 core P/B... Our analysis suggests the stock is still pricing in return on equity (ROEs) of less than 9 per cent long-term and 165bps of long-term credit costs, while
could deliver around 10 per cent ROEs in FY21 and over 12 per cent ROEs over the medium-term. We expect SBI’s valuation to continue to mean revert over the next 6-12 months as more clarity emerges on asset quality in the second half of the current fiscal (H2FY21)," it said.
The recent upward revision in target price factors in two key developments – potential upside in earnings and limited downside risks to capital adequacy.
sees material upside in forthcoming earnings on the back of lower provisioning in FY21/22F. Analysts at the brokerage observed that the management, during Q2FY21 result announcement, guided for slippages (including restructuring) worth Rs 60,000 crore as against its estimate of Rs 70,000 crore. With Rs 15,000 crore of restructuring, CLSA believes, the management’s guidance implies slippages worth just Rs 45,000-50,000 crore in FY21.
"With SBI’s collections remaining strong in the retail segment and low stress in the large corporate segment, we reduce our slippages expectation to Rs 60,000 crore, leading to a 12.5 per cent increase in FY21 earnings estimates. Consequently, the bank may deliver ROEs around 10 per cent in a pandemic year if slippages remain around Rs 52,000 crore (2.2 per cent of loans). In such a scenario, our net profit estimates will further increase from Rs 19,300 crore to Rs 22,400 crore in FY21,” the brokerage said. CHECK EARNINGS ESTIMATES HERE
As regards growth concerns, CLSA says that while SBI’s common equity tier-1 capital (CET-1) at 10.5 per cent is lower than private peer, SBI
has accreted around 70bps of CET-1 capital in H1FY21. With a stronger-than-expected profitability outlook, the bank would not need to raise equity capital for any Covid-related provisioning, it says.
"Given SBI’s relatively strong balance sheet, there is always a risk of national service, but the YES Bank issue bail-out was handled well, and Lakshmi Vilas Bank’s merger with DBS India should address investor ‘concerns relating to SBI’s national service risk’," it noted. CHECK CAPITAL RAISE TARGETS HERE
That said, CLSA believes slower-than-expected uptick in India’s economic growth amid ongoing Covid-19 outbreak, and/or a sharp rise in interest rates, and higher slippage from corporate segment may pose as a key risk, hindering earnings and book value.
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