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State Bank of India’s (SBI’s) shares have been on the radar of investors for some time. The public sector lender’s market capitalization has breached the 5 trillion mark on Wednesday, because of the rally in the stock price. With this, SBI became the third Indian bank to attain this position after HDFC Bank and ICICI Bank.

A couple of factors are at play here. There is optimism around the systemic increase in credit growth translating into increased demand for corporate loans. Also, the general expectation of a turnaround in private capital expenditure is rekindling investors’ confidence in banking stocks. A scenario of rising interest rates bodes well for the entire banking sector and would benefit all good quality banks. The question that arises is what in particular is aiding SBI.

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“With domestic demand being robust, corporate loans are likely to see revival. SBI is a corporate credit heavy bank with its share being around 45-50% of overall loans," said Gaurav Jani, research analyst, Prabhudas Lilladher. In the June quarter (Q1FY23), the share of retail loans in SBI’s loan book was higher than corporate loans, but the latter is expected to catch up. Also, given its Indian Banks’ Association-linked employee profile, another relative advantage for SBI could be lower growth in operating expenses, which could support core pre-provision operating profit, he said.

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More than 70% of SBI’s assets have linkage to floating rates, said analysts. This means the bank’s net interest margin (NIM) would get a boost from repricing of loans in an upward interest rate trajectory. To service the anticipated rise in demand for corporate loans, the bank will also have to raise deposit rates. Thus, the movement in NIMs will be a crucial near-term monitorable for investors in the SBI stock. In Q1FY23, the bank’s overall NIM had fallen sequentially.

Besides, risks relating to asset quality are abating with bad loans and slippages easing. “SBI reported a drastic drop in slippages through FY22, which has improved its balance sheet outlook," Santanu Chakrabarti, director, BFSI lead research analyst, India, BNP Paribas. SBI’s return on equity is expected to hover in mid-teens in the early part of the credit cycle in the next few years, he said.

In Q1FY23, SBI’s gross non-performing assets (NPAs) and net NPAs at 3.91% and 1% fell 141 basis points (bps) and 77bps, respectively, on a year-on-year (y-o-y) basis. One basis point is 0.01%. The slippage ratio at 1.38% in Q1FY23, fell by 109 bps y-o-y.

Further, recent trends in the bank’s return on asset (RoA), an indicator of the profitability, have been encouraging. Abhinesh Vijayaraj, director, equity research, Spark Capital Advisors (India), said SBI is on track to achieve 0.9% RoA by FY24, a number last witnessed in FY13. In FY22, the bank’s RoA stood at 0.67%.

Despite the excitement around the SBI stock, investors need to be mindful of some downside risks. In the Q1FY23 earnings call, SBI’s management had said it will be able to sustain the 15% quarterly y-o-y loan growth.

If the bank chooses to be aggressive on growth led by corporate loans, the improvement in NIMs may be lower-than-anticipated. Generally, corporate loans fetch lower margins than retail loans.

So far in CY22, the SBI stock has risen by 24%, handsomely beating sector index Nifty Bank and key benchmark index Nifty50. SBI enjoys a slew of tailwinds given its scale and size but, even so, the bank is inadequately capitalized to participate in the impending private sector capex boom, according to Krishnan ASV, senior vice president, institutional research, BFSI, HDFC Securities. This is a factor that could cap a steep upside potential in the stock, he said.

 

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