Analyst Corner: SBI best placed in current cycle; target price at Rs 600

SBI has much “option value,” both in earnings (1% RoA) and multiples. Our bull case (>100% upside) reflects this. Its retail franchise has improved, and the corporate cycle is turning – we see material upside risk. Raise price target to Rs 600; we now apply a 25% bull case weight to the core.

The macro backdrop for banks is increasingly looking like the early 2000s…Our macro team expects a virtuous growth cycle in India and has further raised its GDP growth estimates for F22/F23 – this reminds us of the economic backdrop for banks in the early 2000s – banks had gone through a deep NPL cycle and a fall in bond yields helped recapitalise balance sheets. Thereafter, as the macro cycle turned, banks did very well on earnings and re-rated sharply. While private banks did well through the cycle, SoE banks outperformed significantly in the initial years. We think SBI looks best placed in the current cycle.

In our bull case, we build in >1% RoA for SBI – we discuss this in detail, and see increasing risk of this being achieved over the next two years: As the macro cycle turns, we see upside risk to earnings from three sources, higher margins as excess liquidity decreases and rates move higher; lower cost to income ratio – the wage hike cycle has ended, and the rate cycle is turning, which could drive slower cost growth; lower credit costs, helped by moderation in corporate NPLs and lumpy recoveries.

Against this backdrop, valuation has significant upside: SBI has built a strong retail franchise and also sustained its deposit market share. Even on digitisation, the progress has surprised, unlike peer SoE banks. As the corporate cycle turns, we expect earnings estimate upgrades and significant re-rating. In our bull case, we assume >1% RoA in F22/F23 and 1.6x F23e P/BV. This drives bull case SOTP value of Rs 765 (including base case subs valuation of Rs 160), implying ~90% upside. We now apply a 25% probability to the above scenario in valuing the core bank – thereby raising our price target to Rs 600.