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MUMBAI: Shares of State Bank of India (SBI) have been late mover, but they are certainly not missing out on the rally. Of course, some of this has got to do with the steady set of second-quarter numbers announced in early November. Since then, the stock has gained about 45%.

The run up in private sector banking stocks may have also weighed in the recent past. Indeed, the Bank Nifty index is up about 30% since October, with most of its heavyweights in the private banking space. Some of the private sector banks were early movers in the post-lockdown rally, with a significant improvement in valuations.

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Of course, while the PSU tag may still keep SBI’s valuations in check, better operating metrics in Q2 does make the stock look relatively inexpensive compared to other peers in the public space. That has been a driving factor for the stock lately.

“SBI’s valuations at 0.3 times September 2022 book is clearly undemanding, in our view, and in line with much weaker PSU peers. With a much superior franchise both on the liability and asset sides and market share gains on both retail asset and liabilities over the past four years, we believe a premium over PSU peers is warranted. We think a re-rating is imminent as return on equity starts recovering," said analysts at Nomura Financial Advisory and Securities (India) in an early-November note to clients.

Still, the question is how much higher can this PSU behemoth rise? Given that some of the valuation gap has narrowed, the rise may be more gradual hereon and will depend on the recovery in the loan growth in the coming years. SBI has managed its non-performing loans quite well lately despite the pandemic. But even while gross non-performing loans have come down to about 5.4% of loans in Q2, it remains high. Besides, any setback in recovery could again impact gross loans.

And the PSU overhang is very likely. “While the recent regulatory measures have cushioned on the earnings front (at least, especially on the asset-quality recognition part) and the gradual return to normalised business will be a positive for BFSI companies, we believe the capital constrained PSU banks which are still burdened with legacy non-performing assets may take longer to recover and hence near-term return ratios may remain weak," said analysts at Sharekhan in a note.

SBI, however, remains better placed among PSU peers. “We find SBI better placed as compared to its PSU bank peers," noted analysts at Sharekhan. That may support valuations for now given that the markets are continuing to see the gush of liquidity.

But note that stress in several parts of the economy continues, and any delay in economic recovery could impact profitability and hurt non-performing loans.

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