After a strong third quarter, what’s next for SBI stock?

Loan growth of 8.5% year-on-year was driven by retail loans, international loans and an upsurge in demand from small and medium-sized enterprises (SMEs).

However, business lending was a little disappointing, remaining at the same levels as the prior year quarter. Additionally, the gross non-performing assets (NPA) ratio improved from 4.77% in Q3FY21 to 4.50% in Q3FY22.

Moreover, the bank’s management is optimistic about its growth prospects. On a post-earnings conference call, management said growth trends continued to show strong traction with a recovery in most segments.

The growth momentum in retail continued across all products, particularly home loans. On the business side, management experienced strong trends in January, suggesting a good performance in the fourth quarter.

Demand for trade finance loans in the foreign portfolio has also been decent. He also expects slippages to hold steady around current levels of 0.37%.

While management’s outlook for loan growth and asset quality is bullish, a key metric that now needs improvement is return on equity (RoE). SBI’s RoE for the nine months ended December is 14%.

“For the banking sector, a RoE in the range of 15-20% is considered robust and indicates that the bank’s growth is sustainable. So in this environment, an improvement in RoE to 15% will be a revaluation event for the stock, as RoE is directly correlated to the profitability of the bank,” said Siji Philip, Senior Research Analyst, Axis Securities Ltd. .

“The bank’s commentary on loan growth and asset quality is positive and its commitment to RoE is a headline boost, simply because few PSU banks share such confidence when it comes to to talk about RoE,” she added.

SBI management remains committed to delivering a 15% RoE on a sustainable basis and should be helped by increased credit growth, normalization of the cost of credit and improved operational performance.

Echoing a similar view, Nitin Aggarwal, Group Senior Vice President, Banking Research Sector, Institutional Equities, Motilal Oswal Financial Services Ltd, said: “SBI used to make 15% ROE the normal years and that’s why they see it as a good step to achieve.”

To be sure, SBI shares have significantly outperformed the Bank Nifty Index over the past year, suggesting that investors have noted improvements in various performance measures.

To that extent, valuations have risen slightly. Even so, any disappointment in asset quality or a slowdown in loan growth will be a key downside risk for the stock.

The infrastructure boost in the recently announced budget could favor the country’s largest lender. But HDFC Securities analysts said in a report, “The recently announced infra-focused Union budget provides SBI with significant leeway to gain market share in portfolio companies; however, as it is India’s largest bank, we argue that it may be too thinly capitalized to participate in the investment round.”

For now, analysts remain optimistic. For example, Kotak Institutional Equities’ fair value for SBI stock is ₹700, valuing it at 1.5 times the book (adjusted) and nine times the earnings per share of the financial year 2024E for ROE of the order of 15%.

On Monday, shares of SBI closed slightly higher at ₹533.25.