SBI’s valuation gets a re-look from markets as strengths come to fore

State Bank of India Ltd (SBI) has a long standing grouse against the equity markets on its valuation. The chairmen of the bank, including the incumbent, Rajnish Kumar, have expressed their dismay over how the bank is not valued fairly on its strengths.

Adjusted to valuation of subsidiaries, the stock currently trades at a deep discount of 80% to its estimated book value for FY21. Despite having the highest provision coverage for stressed loans in the industry, investors haven’t warmed up to SBI at all. The share price has trailed peers and underperformed the broad market.

But the lender’s shares may finally be getting the much-needed breakthrough. Analysts are beginning to realize that SBI’s proactive measures to safeguard against risks in the past one year are adding value to the balance sheet. Its high provisioning levels are getting attention. Goldman Sachs upgraded the stock to buy from neutral. “In our bull case scenario, if the growth trajectory improves and asset quality turns out better than our expectations, we believe the stock could further re-rate to 0.7 times FY21 BVPS (book value per share), implying an upside of about 70% from current market price,” said the brokerage firm in a note.

With a Common Tier-1 capital ratio of 10.14%, SBI is better placed than most banks to withstand more risk. Of course, a faster economic recovery would make matters easy. But that is true for the whole banking sector and not just SBI. The bank’s liability franchise will help as deposit rates are falling faster than lending rates.

Put the deeply discounted stock in perspective, and valuations are attractive, said analysts. Those at CLSA termed SBI as a “good value opportunity” and have increased their target price for the stock.

“Why SBI is attractive is because of the discount at which it trades. Yes, even their return on equity has fallen, but the valuations are still very low,” said Anand Dama, analyst, Emkay Global Financial Services Ltd.

Dama pointed out that the biggest drag on SBI was Yes Bank Ltd, which now is less of a problem. Earlier this year, SBI led a rescue mission for the troubled private lender and infused more than ₹7,000 crore as capital. Yes Bank was able to raise ₹15,000 crore through a qualified institutional placement without a big support from SBI. “The worry that Yes Bank would eventually get merged with SBI no longer exists. That is a big positive for the stock,” said Dama. But SBI doesn’t win prizes when it comes to balance sheet management.

Despite its size and clout, the bank is unable to shore up recoveries. Its recoveries from past written-off accounts and even stressed loans have been consistently lower than the rate of decay in loans.

Investors may have started warming up to the SBI stock, but they may still show restraint until the lender shows that it can recover its money from borrowers