Morgan Stanley sees 46% upside in State Bank of India

Country’s largest lender State Bank of India (SBI) is best poised to benefit from the improving Indian economy outlook unleashed by growth-oriented budget announced earlier this month.

Global brokerage firm Morgan Stanley has released a report ‘State Bank of India Don’t underestimate the cyclical upside’ revising its price target for the bank to Rs 600. This implies an upside of 46% from Wednesday’s closing price.

SBI has much “option value,” both in earnings (1% Return on Assets) and multiples. Its retail franchise has improved, and the corporate cycle is turning, said the report.

Mimicking macros

Morgan Stanley believes India is at an inflection point that marks the start of a new virtuous growth cycle and has further raised its GDP growth estimates for FY22 & FY23. It is of the opinion that this cycle is very similar to the one in the early 2000s. Where banks had gone through a deep NPL cycle and a fall in bond yields helped recapitalize balance sheets.

Thereafter, as the macrocycle turned, banks did very well on earnings and re-rated sharply. While private banks did well through the cycle, state-owned banks outperformed significantly in the initial years.

The firm thinks that unlike its public sector banks peers, SBI has sustained market share in deposits (including CASA deposits). This has helped the bank maintain its funding cost competitiveness and retain its advantage in cost of disintermediation.

Accelerated retail loan growth and improved its market share over the past three years – the share of retail loans is now at 35% vs 20% a decade back. More importantly, the bank has been able to do this with a proper check on asset quality, unlike its public sector bank peers. In fact, it is similar to some private banks, noted Morgan Stanley.

Focused on improving digital capabilities despite asset quality pressures has helped the bank do well in payment market share as well as accelerate digital loan sourcing (which is now 40% of overall retail loans).

Price targets

With the improving macro-cycle, SBI’s earnings from higher margins as excess liquidity decreases and rates move higher, lower cost to income ratio, and lower credit costs. Against this backdrop, Morgan Stanley believes valuation has significant upside.

In Morgan Stanley’s bull case, it assumes Return on Assets of more than 1% in FY22,23 and 1.6x FY23e P/BV. This drives bull case SOTP value of Rs 765 (including base case subs valuation of Rs 160) implying approximately 90% upside.

Morgan Stanley applies a 25% probability to the above scenario in valuing the core bank thereby raising SBI price target to Rs 600.

Shares of State Bank Of India jumped to record highs of 427.70 in early trades.

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