It’s raining price upgrades on SBI counter after strong Q2 earnings performance

Analysts have raised their price target on the stock by 5-23 per cent following the results announcement on November 3, while most of them also retained their “buy” calls on the scrip.

“SBI is still trading at temptingly low valuations and remains well positioned as a recovery play,” said brokerage firm Edelweiss Securities in a note.

SBI reported better-than-expected net profit, net interest income and asset quality for the reported quarter. The lender’s gross non-performing assets ratio eased to 4.9 per cent from 5.32 per cent in the previous quarter.

Incremental stress on the loan book also declined as slippages in SMA-1 and SMA-2 category shrank 40 per cent sequentially to Rs. 6,690 crore reflecting the improving health of the balance sheet. Analysts said that the lender is exiting the second wave of the pandemic with a stronger balance sheet that has set the stage for growth in the coming years.

Shares of SBI have risen 143 per cent over the past 12 months making it one of the best performing banking stocks on the Street. Much of those gains are on the assumption that lender will be a major beneficiary of the improvement in private capital expenditure going ahead and its own improving asset quality.

“From here on, loan growth will be the key driver of PPOP growth. We remain optimistic on the long term drivers driving profitability,” said brokerage firm Nomura India in a note.

While brokerage firm Edelweiss Securities suggested that SBI has set itself up for more rerating in valuation multiples with its Q2 earnings, much of that rerating will depend on how expectations on loan growth turn out.

For the reported quarter, the lender reported little over 6 per cent year-on-year growth in loans with retail and home loans providing for much of the growth. At the same time, the corporate loan book shrank nearly 4 per cent indicating that the corporate capex cycle was still some way away.

“We see risk-on gaining momentum and potential dwindling of social costs. A discount to private peers is nevertheless warranted on account of lower credit cost elasticity (low provisioning) and structural limitations,” said Edelweiss Securities.