Steady NIM, credit costs may drive SBI's re-rating in near-term: Analysts

The stock of State Bank of India (SBI) may re-rate soon, believe analysts, if the lender manages to safeguard its net interest margin (NIM) going ahead.

This, along with controlled credit costs, should aid the outlook of the stock which has been underperforming the markets for some time now.

“We believe delivery of growth on guided lines, sustenance of NIMs near current levels, and controlled asset quality parameters aiding controlled credit costs should lead to strong profitability and drive re-rating of the stock,” said analysts at JM Financial.

During the July to September quarter of the current financial year, SBI’s NIMs for domestic operations moderated by 12 basis points to 3.43 per cent from 3.55 per cent in Q2FY23.

Sequentially, NIMs fell lower-than-expected from 3.47 per cent in Q1FY24.

The management expects margins compression in the future to be limited to 5bps.

“We expect SBI sustaining return on asset (RoA) of 1 per cent in FY25-26, and high leverage lifting return on equity (RoE) to 15-16 per cent.

"CET-1 (including profit) at 11 per cent vs. requirement for 8.6 per cent may be sufficient for now especially give high RoE ploughbacks,” said Jefferies, who has a ‘buy’ rating and a target price of Rs 780.

SBI reported a NII of Rs 39,500 crore (up 1.5 per cent Q-o-Q/12 per cent Y-o-Y).

Higher opex from revision in wage provisions led to a pre-provision operating profit (PPoP) of Rs 19,400 crore (down 23 per cent Q-o-Q/8 per cent Y-o-Y).

However, lower provisions (0.23 per cent credit costs) resulted in a net profit of Rs 14,330 crore (up 8 per cent Y-o-Y/ down 15 per cent Q-o-Q).

Its loan growth was 3.4 per cent Q-o-Q/13 per cent Y-o-Y at Rs 33.5 trillion, while deposit growth stood at 3.5 per cent Q-o-Q/12 per cent Y-o-Y at Rs 47 trillion.

“SBI has amongst the lowest domestic LDR (64 per cent) and thus there is much scope to improve.

"The progress, however, has been gradual so far, underpinning our 10bps Y-o-Y compression in NIM for FY25. SBI has relatively lower common equity tier-1 (CET 1) across peers, but has strong internal accruals, which are sufficient to fund near-term envisaged credit growth.

"Improvement on fee and, thus, core PPoP could lead to swift re-rating of the stock,” said analysts at ICICI Securities.

That said, analysts believe the re-rating may be gradual as the triggers, which have historically led to the re-rating, have not been playing out.

“Typically, RoE reversals led by changes in credit costs play the most important role for a bank stock’s re-rating.

"However, this has been broken for SBI. We are at RoE that is closer to 15-year highs and at the lowest level of credit costs in the past 25 years.

"Yet, the bank is trading below book (one-year forward),” said analysts at Kotak Institutional Equities.

Worries about the impact of relatively lower capital adequacy levels, comfort of loan mix due to presence of unsecured loans, and NIM contraction cycle have been weighing on the stock.

In the past year, the stock of SBI has slipped 1.2 per cent on the BSE as against a 5.8-per cent rally in the benchmark S&P BSE Sensex.

So far this calendar year, the stock has declined 5.7 per cent as against a 5.8-per cent gain in the Sensex index.

“While we acknowledge that these risks are valid concerns, we are not yet sure about the quantum of the impact of the above concerns if they materialise,” Kotak Institutional Equities said.

“The bank is growing its loan book a lot more cautiously, which gives greater comfort.

"The liability franchise remains impressive, which augurs well on credit costs.

"We should see the bank trading at higher levels as the quality of earnings would continue to surprise positively,” it added.

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