Market share, valuation: 5 reasons why CLSA is bullish on SBI amid Covid-19

CLSA believes that SBI deserves to trade at a premium valuation to peers
India's largest public sector bank, State Bank of India (SBI), is firming its position as analysts' favourite in the banking sector amid the Covid-19 pandemic. Despite the potential instability in the financial sector due to fear of spurt in non-performing assets (NPA), global brokerage CLSA sees SBI as "a deep value opportunity", as it believes the bank is relatively better positioned on asset quality post Covid-19, and is driven by high government / PSU share in loan book.

In a report dated August 20, CLSA upped the target price on the stock to Rs 310, translating into 59.2 per cent upside from Thursday's closing price on the BSE, on the back of the bank's ability to gain market share amid the coronavirus outbreak, healthy subsidiaries, and comfortable asset quality position.
"With ROEs expected to normalise to more than 10-11 per cent post-Covid-19, we believe current valuations at 0.3x Jun-22 book are undemanding. We are more comfortable on SBI’s asset quality/disclosures and hence increase our SOTP-based target price from Rs 270 to Rs 310, valuing core bank at 0.7x Jun-22 book and Rs131/share of sub value," noted Adarsh Parasrampuria, analyst at CLSA, in a co-authored report with Saikiran Pulavarthi and Mohit Surana.

Parasrampuria says that SBI's loan-book composition provides the bank with comfort against any potential Covid-19 asset-quality hit. With 40 per cent of domestic corporate loans, two-thirds of mortgages, more than 90 per cent of personal loans, and most of overseas corporate loans coming from the PSU/government sector, SBI is better placed than larger peers to hold its fort.

Secondly, CLSA notes that SBI, despite facing tough competition from private players, has gained or maintained share in retail assets, CASA (Current Account- Savings Account), overall loans, and deposits through the last decade, leading to more than a 10 per cent compound annual growth rate (CAGR) in core pre-provision operating profit (PPoP) in the past 5-10 years.

The third factor that makes CLSA positive on SBI is the lender's ability to be the "lender of last resort" for peer banks. "YES Bank’s bailout demonstrates the ability of government and SBI to balance national interest versus minority interest. SBI’s Rs 7,800 crore investment was about 30 per cent of capital infused in YES Bank and about 4 per cent of its net worth while private banks put in 1-2 per cent of their net worth," the analysts say. With YES Bank slowly showing signs of turnaround, they believe the risk of hand-holding a troubled lender is now over.

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Best-in-class subsidiaries, who are compounding at a fast pace, is the next factor that makes CLSA bullish on the lender. All the subsidiaries of SBI have compounded by a 25-40 per cent CAGR over the last 3-5 years and have become market leaders, which the analysts believe, was driven by SBI’s distribution strength. "Subs explain more than 60 per cent of the current price and 40 per cent of our target price should continue to compound at a fast pace. Subs contribution also ensures that capital raising is not book-dilutive like other PSUs," they say.

Lastly, the analysts believe that SBI "deserves to trade at a premium valuation to peers, given its stronger deposit franchise, downside support from subsidiaries and low risk of dilution vis-a-vis other PSU bank peers".

At the bourses, SBI surged 3.4 per cent to hit an intra-day high of Rs 201.5 per share on Friday. A combined 70.81 million shares changed hands on the counter on the NSE and BSE today. The stock ended 1.8 per cent higher at Rs 198 per share on the BSE.

The stock has seen swift upmove since it reported its strong June quarter results on July 31. The bank clocked 81.18 per cent rise in its net profit to Rs 4,189.34 crore, as against Rs 2,312.2 crore net profit reported in the June quarter of FY20. It's pre-tax profit for the quarter was up 36.8 cent to Rs 5,559.7 crore. The bank said its loans under moratorium were 9.5 per cent at the end of June, 2020 quarter compared with 23 per cent at the end of March quarter of FY20.

Between July 30 and August 20, the stock has gained 4.3 per cent, compared to 1.2 per cent growth in the S&P BSE Sensex, BSE data show. The sectoral S&P BSE Bankex, meanwhile, increased 1.3 per cent during the period.  


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