SBI rallies 10% in two days on expectation of improvement in asset quality

Shares of State Bank of India (SBI) have rallied 6% to Rs 269 per share, extending their 4% gain on the BSE on Tuesday, on expectations of improvement in asset quality of the state-owned bank.
“While gross slippages for FY18 were high at around Rs 1 trillion (5.2% of advances), management’s watchlist of accounts (Rs 25.8 billion) is a low 13% of advances and lends comfort on asset quality,” analyst at BOB Capital Markets said in result review.

“With non-performing assets (NPA) recognition largely behind us, we expect slippages to normalise at 2% of advances in FY19 and 1.4% in FY20. Hence, we estimate credit costs of 200bps/140bps in FY19/FY20, resulting in ROE improving from –3.2% in FY18 to 11% in FY20,” the brokerage firm said in a note.

We reiterate BUY on SBI with 12 month target price of Rs 345, given a healthy domestic credit growth outlook for the bank (10% CAGR over FY18-FY20E) backed by its dominant market share (around 25%), likely improvement in asset quality (NNPA of 4.5% in FY20E), and adequate capital (tier-1 at around 10% in Mar’18).