State Bank of India share price jumps over 3% after bank raises cheap capital; should you buy?

In a move that will further strengthen the financials of State Bank of India, the lender managed to raise Rs 4,000 crore through issuance of AT1 bonds.

India’s largest PSU bank State Bank of India’s (SBI) share price jumped 3.12% on Thursday morning to Rs 201 per share. The upward move in the stock comes after SBI’s share price fell over 7% in the last 4 trading sessions. The largest public lender has recently found the backing from a number of global brokerage firms, each coming out with a ‘Buy’ call on the scrip with a positive outlook, even though lenders in India continue to be under the threat of renewed non-performing assets (NPA) aided by the economic slowdown caused by the pandemic.

In a move that will further strengthen the financials of State Bank of India, the lender managed to raise Rs 4,000 crore through issuance of AT1 bonds. One of the riskiest bonds in the market, as they can be written off by the issuer, usually attract a high coupon rate for the risk that they carry. However, SBI managed to raise the amount at just 7.74% coupon rate, which is lowest for such an issuance. The additional Rs 4,000 will help boost the bank’s capital as it gears up to fight the aftermath of a pandemic.

Analysts believe that SBI’s asset quality is better placed than most other lenders and the valuation is still attractive. “We expect the bank to post an ROA/ROE of 0.5%/8.9% by FY22E led by healthy balance sheet growth along with higher PCR and stable asset quality,” said LKP Securities in a recent note. Slippages have been stable for SBI, with the headline gross NPA and net NPA ratio declined substantially to 5.44% and 1.86% respectively. “The Bank has been retaining its market share 21% of total scheduled commercial bank’s credit as credit grew by 7.7% on-year though de-grew by 1.2% sequentially,” LKP securities added as the recommended investors to buy the stock with a target price of Rs 285 per share.

However, the key overhang for the lender remains the transition of the new Chairman as Rajnish Kumar demits office in October this year. The Banks Board Bureau has recommended Dinesh Kumar Khara for the post of SBI Chairman. Earlier last month, CLSA noted that SBI’s large share of government and PSU employees makes it better placed than larger peers. CLSA has a target price of Rs 310 on the SBI stock.