Bullish indicating open at $55-$60, IPO prices at $37
On Tuesday, Citi analyst Kunal Shah upgraded State Bank of India (NSE:SBI) (SBIN:IN) stock from ’Sell’ to ’Buy’, adjusting the price target to INR830.00, up from INR720.00. Shah cited several reasons for the upgrade, including the bank’s management focus on net interest margin (NIM), the rebound of Xpress Credit growth, and a reduction in credit costs.
The management of State Bank of India has outlined a series of initiatives aimed at optimizing liability costs and identifying yield levers. The relatively low percentage of External Benchmark Lending Rate (EBLR) loans at about 28%, along with the repricing of Marginal Cost of funds based Lending Rate (MCLR) hikes, are expected to safeguard the NIM from downside risks.
Additionally, the bank’s growth visibility is supported by the traction of Xpress Credit, a robust corporate pipeline, and an accelerated rollout of housing loans, among other factors. The bank has also managed to contain unsecured retail slippages at 0.5% and rein in the Special Mention Account (SMA-2) pool, with credit costs expected to be curtailed to less than 50 basis points.
Further supporting the upgrade, the restoration of risk weights on Non-Banking Financial Company (NBFC) lending is anticipated to boost the bank’s Common Equity Tier-1 (CET-1) ratio by 25-30 basis points. This comes as a relief as weak market sentiments have lessened the immediacy of an equity raise.
In light of these factors, Citi has revised its earnings estimates for State Bank of India by 1-2% for the fiscal years 2026 and 2027. The new price target of INR830 is based on assigning a multiple of 1.2x the bank’s FY26E book value for its banking business, which is an increase from the earlier multiple of 1x book value. Shah noted that the stock has experienced a correction of 18%, 16%, and 10% over the past 3, 6, and 12 months, respectively, underperforming the Bank Nifty by 10-12%. Despite this, the valuations remain attractive at 0.85x book value, considering the bank’s 1% return on assets (RoA) and 15% return on equity (RoE).
In other recent news, State Bank of India reported a third-quarter profit after tax of Rs 168.9 billion, surpassing UBS estimates. The higher-than-expected earnings were primarily due to reduced credit costs, which were recorded at 23 basis points on an annualized basis. However, the bank experienced a shortfall in net interest income, which grew by only 4.1% year-over-year, and a decline in treasury income. Net interest margins fell by 13 basis points quarter-over-quarter, attributed to an increase in the cost of deposits and slower growth in high-yield, unsecured retail segments.
Despite these challenges, pre-provision operating profit increased by 16% year-over-year as operating expenses decreased by 6%. UBS analyst Vishal Goyal maintained a Sell rating on the bank, citing concerns over the bank’s relatively lower core pre-provision operating profit to assets and low counter-cyclical buffers. Gross non-performing asset formation improved quarter-over-quarter, arriving at approximately 43 basis points. UBS anticipates continued pressure on net interest margins and an upward trend in credit costs. The bank’s stock is trading at 1.1 times the forecasted FY26 price-to-book value, and UBS sees no upside potential in the current risk-reward profile.
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