CLSA says there is still deep value in SBI shares

CLSA still sees deep value in shares of State Bank of India even after the 25% plus surge in the stock in the last four months.

The foreign brokerage has reduced the estimate for slippages in the ongoing financial year to Rs 60,000 crore. Because of this, CLSA has raised earnings estimates on SBI by 6-12% and raised target price to Rs 360 from Rs 330 while retaining a buy rating.

The stock is still pricing in return on equity of less than 9% long term and 165 basis points of long term credit costs while SBI could deliver 10% plus ROE in FY21 and 12% plus ROE over the medium term.

"We expect SBI’s valuation to continue to mean revert over the next 6-12 months as more clarity emerges on asset quality in the second half of FY21," said CLSA.

The brokerage pointed out that even though SBI shares have gone up by over 25% in the last four months, it still trades below an undemanding 0.5 times FY22 core price-to-book value.

CLSA said that given SBI’s relatively strong balance sheet, there is always a risk of national service, but the YES Bank issue bail-out was handled well and Lakshmi Vilas Bank’s merger with DBS India should address investor concerns relating to SBI’s national service risk.

"While SBI’s CET-1 at 10.5% is lower than private peers, SBI has accreted 70 bps of CET-1 capital in 1HFY21, and with a stronger-than-expected profitability outlook, the bank would not need to raise equity capital for any Covid-related provisioning," said CLSA.