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Overview:
The in-depth analysis examines SBI’s financial performance, market position, growth prospects, risks, and intrinsic valuation. It notes SBI’s market dominance as the largest public sector bank in India, strong government backing, and aggressive expansion into digital banking. However, high NPAs, regulatory risks, and economic sensitivity remain concerns. Comparing key metrics like P/E ratio, intrinsic value, dividend yield and profit growth suggests SBI is significantly undervalued relative to peers. SBI’s extensive reach, ongoing digital transformation and India’s economic growth potential offer solid long-term upside, though investors should be aware of asset quality issues and macroeconomic risks.
Company Introduction and Profile:
State Bank of India (SBI) is a Fortune 500 entity and a leading Indian multinational in the banking and financial services sector. Founded over 200 years ago, it holds the distinction of being the largest and oldest bank in India, with its headquarters in Mumbai. As of the latest data, SBI has a market capitalization of ₹5,51,273 Cr, reflecting its significant position in the Indian banking industry.
The bank’s financial performance shows a robust operational margin (OPM) of 43.6%, indicating efficient operational management. Its debt to equity ratio stands at 13.9, which is moderately high but manageable considering its industry and scale. The company’s promoter holding has been relatively stable, a sign of consistent leadership confidence. Additionally, the stock’s current price is ₹618, with a high dividend yield of 1.83%, making it attractive for dividend-seeking investors.
State Bank of India (SBI) is the largest public sector bank in India with over 200 years of history. It has a market capitalization of over Rs 5.5 lakh crores.
Some key facts:
- SBI has over 22,000 branches across India and 190 foreign offices spread across 36 countries. It serves over 40 crore customers.
- As of Q1FY24, SBI has a healthy capital adequacy ratio of 14.5%, net interest margin of 3.34%, gross NPA of 4.77% and net NPA of 1.23%. Its CASA ratio stands at 45.15%.
- For FY23, SBI clocked record net profit of Rs 57,750 crores on the back of strong NII growth and lower provisions. Total income grew by 26% YoY.
Investment Recommendation:
Should We Buy, Sell, or Hold?
- Buy Recommendation: SBI’s stock shows several positive indicators for a buy recommendation. The bank has a stable or increasing promoter holding, an improving operational profit margin (OPM), and a low pledged holding. Furthermore, the stock’s price-to-earnings (P/E) ratio is 8.09, lower than the industry average of 13.4, suggesting it might be undervalued. The dividend yield of 1.83% is also a positive sign for income investors.
- Sell or No Buy Recommendation: Despite these positives, there are cautionary aspects to consider. The high debt to equity ratio (13.9) and the low return on equity (ROE) over the last three years (12.8%) are concerning. Additionally, the company has a relatively low interest coverage ratio, indicating potential difficulty in meeting interest obligations.
- Caution Recommendation: The mixed performance in certain areas, such as the high debt to equity ratio and the lower ROE in recent years, suggests a cautious approach. The difference between the current market price (CMP) and book value is also noteworthy, with the CMP being significantly higher than the book value of ₹402.
I would consider buying or accumulating the stock of SBI from a long-term investment perspective for the following reasons:
Positive Factors:
- SBI has delivered strong compounded annual profit growth of 76% over last 5 years indicating its earnings potential.
- The bank maintains healthy return ratios like ROE of 17% and ROCE of 5.2% demonstrating efficient capital allocation.
- Gross NPA has declined to 4.77% from 7.53% last year showing asset quality improvement. The bank has recognizing bad loans and providing for them.
- Promoter (Government of India) holding is high at 57.5% and increasing showing high confidence in the bank’s prospects.
- Valuations look reasonable with stock P/E of just 8x compared to industry average P/E of 13.4x.
Negative Factors:
- SBI has delivered modest sales growth of 8.91% over past 5 years. Loan growth needs to pickup.
- Contingent liabilities are very high at Rs 19 lakh crores indicating high risk.
Overall, the positives especially in terms of profit growth, valuations and promoter holding confidence outweigh the negatives. SBI being the banking behemoth in India is poised for healthy growth going forward. Investors can buy the stock on dips from a 3-5 year investment horizon.
Vital Company Ratios for a Layman:
For a layman, understanding key financial ratios is crucial in making an informed investment decision:
- Debt to Equity Ratio (13.9): This ratio is slightly on the higher side, indicating the company has more debt compared to its equity. It’s a measure of the company’s financial leverage and risk.
- Price to Earnings Ratio (8.09): Compared to the industry average, SBI’s P/E ratio is lower, suggesting the stock might be undervalued.
- Return on Equity (16.8%): This is a measure of profitability and efficiency in using shareholders’ equity. SBI’s ROE is decent, reflecting its ability to generate profits.
- Dividend Yield (1.83%): This is attractive for investors looking for regular income from their investments.
- Operational Profit Margin (43.6%): A high OPM indicates effective management and operational efficiency.
- Price to Book Ratio – SBI’s stock is trading at 1.5x its book value per share indicating that assets backing each share is decent. Most banking stocks trade at 1-2x book values.
- Debt to Equity Ratio – SBI has a debt to equity ratio of 13.9x meaning it uses debt of Rs 13.9 for every 1 rupee of equity capital employed. Most banks have debt equity ratios in 10-15x range. Lower ratio shows stronger balance sheet.
- Gross NPA % – SBI has managed to reduce its Gross NPA% to 4.77% from peak of 10.9% in 2018. Lower NPA% indicates improving asset quality.
- ROE & ROCE – SBI has ROE (return on equity) of 17% which measures efficiency in using shareholders’ funds. Its ROCE (return on capital employed) is 5.2% indicating adequate returns on total capital deployed. Higher ROE and ROCE is better.
In conclusion, considering SBI’s strong market position, stable promoter holding, and improving operational metrics, the stock presents a compelling case for long-term investment, albeit with a cautious approach due to its high debt and mixed performance in certain areas.
SBI has an attractive P/E valuation of 8x, decent 1.5x price to book, good dividend yield of 1.8% and healthy ROE of 17%. Its debt to equity of 13.9x is under control while NPA reduction to 4.77% indicates improving loan book. Thus overall ratios analysis also indicates SBI stock as investment worthy.
Risk Factors Related to State Bank of India and the Banking Industry
Key Risks Associated:
- Regulatory Risks: The banking sector is heavily regulated, and changes in policies, interest rates, and banking norms can significantly impact operations.
- Market Competition: With the rise of private banks and fintech companies, SBI faces intense competition, especially in areas like digital banking and customer service.
- Economic Fluctuations: As a major bank, SBI’s performance is closely tied to the overall economy. Economic downturns can lead to increased non-performing assets (NPAs). As loans growth is linked to GDP growth, any prolonged slowdown will dampen credit off-take and earnings.
- Technological Risks: Rapid technological advancements necessitate continuous investment in technology to stay competitive.
- Credit Risk: Being a major lender, SBI faces risks associated with borrowers’ inability to repay loans, impacting its asset quality. As an lending institution, deterioration in asset quality and rise in NPAs is a key risk. Though SBI has seen improvement recently, any macro slowdown can again increase bad loans.
- Operational Risks: These include risks from internal processes, people, and systems, or from external events impacting operations.
- Liquidity risk – Inability to meet short term funding requirements can severely impact operations. SBI has strong deposit franchise but liquidity needs to be managed actively.
- Interest rate risk – Any volatility in interest rate cycles driven by RBI policies can impact net interest margins. Rising rates is especially risky.
- Regulatory risks – Any adverse changes in banking and lending policies by RBI and government agencies can impact profitability.
Risks to Consider Before Investing:
- Asset Quality Concerns: With a Gross NPA of 4.77% and Net NPA of 1.23%, monitoring asset quality is crucial.
- Debt to Equity Ratio: At 13.9, it indicates a higher level of debt, which could be risky if not managed properly.
- Interest Rate Risk: Fluctuations in interest rates can impact profitability.
- Foreign Exchange Risk: Due to international operations, currency fluctuations can affect earnings.
Potential Risks of the Banking Industry:
- Cybersecurity Threats: Banks are increasingly targeted by cyber-attacks, which can lead to significant financial and reputational damage.
- Compliance Risks: Failing to comply with laws and regulations can result in fines and legal issues.
- Non-Banking Financial Companies (NBFCs) and New Age Banks: These entities are changing the traditional banking landscape.
Management Quality Assessment
SBI is headed by Chairman Mr. Dinesh Kumar Khara who has over 35 years of experience with the bank. Overall management pedigree is strong as senior leadership comprises veterans grown within SBI having hands-on understanding of banking.
As per available data, there are no criminal or corruption cases against any promoters or top management personnel. SBI also has seasoned industry professionals and bankers on its board like Mr. Chandan Bhattacharya.
Thus overall management track record and quality is quite robust for SBI. It follows high standards of corporate governance expected of a top public sector bank.
Long-Term Performance Outlook
In the long term, SBI is expected to benefit from India’s growing economy and the increasing demand for financial services. The bank’s extensive branch network and customer base provide a solid foundation for growth. Its focus on digital transformation and expansion into new financial services, like wealth management and insurance, are positive signs.
Long-term success will depend on how well SBI manages its NPAs and adapts to the evolving digital banking landscape. Continued government support and policy reforms in the banking sector are also critical factors. The bank’s ability to innovate and improve its risk management practices will play a crucial role in its long-term performance.
- As the country’s largest lender, SBI is best positioned to ride India’s underpenetrated banking and loans market. Credit growth is expected to pick-up steam.
- Digital and technology investments coupled with expansive customer reach and feet-on-street shall aid in multi-fold business growth.
- With strong liabilities franchise (deposits growth) and provision buffers shored up, SBI’s margins and profitability shall continue to expand over coming years.
- The bank aims to become more efficient by consolidating subsidiaries into parent operations thereby extracting cost synergies. This shall boost profitability.
- Asset quality pressures significantly behind with retail taking majority share in loan book, SBI is projected to deliver 15%+ ROE and 18-20% EPS CAGR over 5 years.
Thus robust parentage, extensive network strength, margin drivers and easing NPA concerns make SBI a promising long term compounding story. Valuations still appear reasonable.
Short-Term Performance Outlook
In the short term, SBI’s performance is likely to be influenced by current economic conditions, interest rate trends, and regulatory changes. The ongoing pandemic’s impact on the economy could affect loan repayments and increase NPAs, potentially impacting profitability.
The bank’s recent efforts in digital banking and customer service improvements should aid in competitive positioning. Short-term performance will also be influenced by the bank’s ability to manage its debt and capital adequacy. Market sentiment, influenced by global and domestic economic trends, will also play a role in the stock’s short-term movement.
In the near term of 12-18 months, SBI is expected to exhibit:
- NIMs expansion by 10-15 bps annually leading to steady net profit growth in mid-teens. This shall be supported by rising yields and lower slippages.
- Advances growth is seen picking up to 12-15% driven by retail acceleration as corporate capex is still subdued. Deposit momentum shall continue.
- Prudent provisions and strong recoveries shall contain NPAs around 3.5-4% range helping contain credit costs boosting profits.
- Consolidated ROA and RONW to remain in excess of 0.7% and 15% respectively indicating earnings efficiency versus last 5 years average.
- P/E valuations might undergo some de-rating closer to long term P/E band of 10-12x from the currently cheap <9x levels as profitability expands.
Thus backed positive business momentum, strong margins and lower NPAs, SBI is projected to deliver 12-15% EPS CAGR over next 2 years making it attractive from short term lens too. In summary, SBI’s position as a leading bank in India, along with its strategic initiatives and government backing, suggest a stable outlook. However, investors should closely monitor the risks and management’s response to these challenges, both in the short and long term.
Medium-Term Performance Outlook for State Bank of India
In the medium term, spanning 2 to 6 years, the performance of State Bank of India (SBI) can be expected to evolve based on several key factors and trends. This timeframe allows for the observation of the impacts of current strategic initiatives, economic cycles, and market developments.
Over the next 2-6 years period, SBI is projected to deliver healthy growth and profitability based on the following factors:
- Credit growth to accelerate to 14-16% CAGR over next 3-5 years as economic growth picks up pace. Retail loans mainly housing and auto financing shall be growth drivers.
- CASA deposits ratio to remain above 45% due to extensive branch network helping keep funding costs low. NIMs expected in the range of 3.25%-3.50%.
- With large stressed assets recognition already done, GNPA ratio to trend down towards international standards of sub-3%. This shall contain credit costs helping profitability.
- Strong balance sheet size, capitalization levels and provisioning cover to enable 15%-18% loan book growth without equity dilution.
- ROA to remain around 0.8% while ROE to be in the 17%-20% range owing to rising margins and lower NPAs.
- Consolidated earnings per share is projected to grow at 18-20% CAGR over next 5 years as cost rationalization efforts yield result.
- Valuations may undergo some upgrades closer to 12-15x P/E multiples owing to double-digit EPS growth over medium term.
SBI is poised to deliver robust financial performance operationally and valuation-wise over the 3-6 years period offering good wealth creation for investors. Execution of growth-profitability drivers shall be key monitorables.
Economic and Market Trends:
- Economic Growth: India’s economic growth trajectory is a crucial factor. As the economy expands, demand for banking services, including loans and asset management, is likely to increase, benefiting SBI.
- Digitalization Push: SBI’s ongoing investment in digital banking services is expected to yield results in this period. Enhanced digital platforms can attract a younger demographic and improve operational efficiency.
Financial Health and Performance Metrics:
- Asset Quality: The management of non-performing assets (NPAs) will be pivotal. SBI’s current Gross NPA of 4.77% and Net NPA of 1.23% need to be reduced for healthier balance sheets.
- Capital Adequacy and Debt Management: The bank’s capital adequacy ratio of 14.50% and a high debt-to-equity ratio of 13.9 indicate areas needing attention. Efficient capital management and debt reduction strategies will be essential.
- Profitability Indicators: Metrics like Return on Equity (ROE) and Operational Profit Margin (OPM) will be key indicators of SBI’s financial performance. An improvement in these areas could signal strong medium-term prospects.
Regulatory and Competitive Landscape:
- Regulatory Environment: Changes in banking regulations, particularly concerning NPAs and capital requirements, could impact SBI’s operations and profitability.
- Competition from Private Banks and Fintech: The competitive landscape, including the rise of fintech firms and agile private banks, will challenge SBI to innovate and retain market share.
Strategic Initiatives:
- Branch Network Optimization: Rationalizing its extensive branch network to focus on profitability while expanding its digital footprint will be crucial.
- Diversification of Services: Expanding beyond traditional banking into areas like wealth management, insurance, and investment services can provide new revenue streams.
Risks and Challenges:
- Global Economic Fluctuations: Global economic trends, including interest rate changes and inflation, can impact SBI’s international operations and foreign exchange earnings.
- Operational Risks: These include risks from cyber threats, technological advancements, and maintaining service quality.
In summary, SBI’s medium-term performance will largely depend on its ability to navigate the evolving banking landscape, manage financial health (particularly NPAs and capital adequacy), and adapt to technological changes. The bank’s role in India’s financial sector and its efforts to modernize and diversify its services will be pivotal in shaping its performance in the coming 2-6 years. Investors should monitor these aspects alongside global and domestic economic trends for a comprehensive assessment.
Vital SBI Data
Promoter Holding
- Sep 2023: 57.49%
- Promoter (Government) Holding – Very high and steady at 57.5% in Sep’22 indicating high promoter confidence
FII/DII Holding
- DiI Holdings – Increasing steadily from 24.4% in Mar’21 to 25.4% in Sep’23 signaling rising institutional interest
- FII Holdings – Fell slightly from 9.9% in Dec’20 to 9.6% in Jun’22 but recovering back to 10.7% in Sep’23
Sales Trend
- Yearly Revenue (in ₹ Cr.):
- Mar 2021: 278,115
- Mar 2022: 289,973
- Mar 2023: 350,845
- TTM Sep 2023: 398,452
- Sales (Income) – Strong 26% YoY growth in FY22 and further accelerating 29% YoY so far in FY23 signifying growth recovery
Profit Trend
- Profit After Tax (in ₹ Cr.):
- Mar 2021: 24,280
- Mar 2022: 36,356
- Mar 2023: 56,558
- Profit – Robust 76% CAGR over last 5 years and 66% growth in trailing 12 months
Debt Trend
- Total Debt (in ₹ Cr.):
- Mar 2021: 4,149,127
- Mar 2022: 4,536,570
- Mar 2023: 4,989,687
- Debt – Increased by 10% YoY as on Mar’23 but Debt/Equity ratio at 13.9x is under control
Margin Trend
- Operating Profit Margin (OPM):
- Latest: 43.6%
- Margins (NIMs) – Improving from 2.9% to 3.34% aided by rising yields and lower NPA provisions
Company PE and Industry PE
- Company PE: 8.09
- Industry PE: 13.4
- Dividend Payout – Consistent at 16-18% reflecting strong earnings and cash flows
- Cash & Investments – Very high at over Rs 5 lakh crores as on Sep’23, near 20% of balance sheet size
- PE Valuation – Attractive at just 8.1x compared to industry average of 13.4x
Gap Between Intrinsic Stock Value and Current Market Price
- Intrinsic Value: ₹1516
- Current Market Price: ₹618
- Gap: ₹898 (Intrinsic Value higher)
- Intrinsic Value – At Rs 1,516 per share, it is significantly above current market price of Rs 618 indicating undervaluation
Market Cap
- SBI: ₹5,51,273 Cr.
Cash in Hand
- Cash Equivalents (as of Sep 2023): ₹3,18,312 Cr.
Dividend Payout
- Latest: 1.83 %
Competing Companies and Comparative Performance
The primary competitors of State Bank of India in the public sector banking space include Bank of Baroda, Punjab National Bank, Union Bank of India, Indian Overseas Bank, and Canara Bank.
Some of SBI’s key public sector peers are Bank of Baroda, Canara Bank and Union Bank. In terms of key financial metrics:
- SBI with a market cap of over Rs 5.5 lakh crores is the industry behemoth in PSU banking space. Its size is nearly 5x that of second largest peer Bank of Baroda.
- SBI’s profitability as measured by ROCE and ROE is the best among all peers. For FY23 its ROCE was 5.2% and ROE 17% compared to median ROCE/ROE of 4.7%/12.8% for the sector.
- SBI’s valuation as per Sep’22 data is cheapest amongst peers with P/E of just 8x compared to median P/E of 9.4x for the industry.
- SBI has delivered highest compounded EPS growth of 76% in last 5 years compared to 50% median growth for peers indicating rapid growth.
- SBI’s asset quality as measured by GNPA ratio has improved sharply to 4.8% as of Dec’22. This is superior to 6-7% range for most PSU bank peers.
- SBI has among the best CASA deposits ratio of 45% lending stability to low-cost funding. Apart from Bank of Baroda’s 42% ratio, other PSU banks have 32-36% CASA only.
Comparative Analysis:
- Market Position: SBI is the largest bank in India, both in terms of market cap and branch network, which provides a significant competitive edge.
- Profitability and Growth: SBI has shown a consistent growth trend in sales and profit, outperforming several of its peers. Its profit after tax shows a rising trend, indicating robust financial health.
- Digital Transformation: SBI is more aggressively pursuing digital transformation compared to some of its peers, which is crucial in the current financial services landscape.
- Asset Quality: Comparing NPA ratios, SBI seems to be managing its asset quality relatively well, though it’s a sector-wide concern.
- Valuation: With a PE ratio lower than the industry average, SBI appears to be undervalued compared to its intrinsic value and peers, suggesting potential for growth.
Competitive Edge:
- Government Backing: As a state-owned entity, SBI enjoys strong government support, enhancing its credibility and stability.
- Diversification: SBI has diversified its services more comprehensively than some of its peers, venturing into areas like insurance, wealth management, and international banking.
Is This Stock Overvalued or Undervalued?
Determining whether State Bank of India (SBI) is overvalued or undervalued involves analyzing various financial metrics and market indicators:
Price-to-Earnings (PE) Ratio:
- SBI’s PE ratio stands at 8.09, which is significantly lower than the industry average of 13.4. This suggests that, relative to its earnings, SBI’s stock is priced lower than its peers, indicating potential undervaluation.
Intrinsic Value vs. Market Price:
- The intrinsic value of SBI’s stock is ₹1516, while the current market price is ₹618. This substantial difference indicates that the market price is much lower than the estimated intrinsic value, further pointing towards undervaluation.
Dividend Yield:
- With a dividend yield of 1.83%, SBI offers a decent return to shareholders, which is attractive, especially in a low-interest-rate environment.
Market Position and Future Prospects:
- As the largest bank in India, SBI’s strong market position and government backing add to its stability and growth prospects, potentially increasing its value.
Should We Buy This Stock and Why?
Reasons to Consider Buying:
- Undervaluation Indicators: The low PE ratio and the gap between intrinsic value and market price suggest that the stock may be undervalued, offering a potentially attractive entry point for investors.
- Stable Dividend Payouts: The consistent dividend payout is appealing for income-focused investors.
- Growth Prospects: SBI’s ongoing digital transformation and expansion into new financial services could drive future growth.
- Market Dominance: As a leading bank with extensive reach, SBI is well-positioned to benefit from India’s economic growth
On various parameters, SBI stock appears significantly undervalued:
- With TTM EPS of Rs 76.4, P/E ratio is an attractive 8.1x vs industry average of 13.4x
- Comparing to 5-year average P/E of 13-14x too, current P/E signals massive undervaluation
- Price to book value is at 1.5x which is lower than industry for a banking leader of SBI’s scale
- The stock price CAGR including dividends of 17% over 5 years has lagged behind 30% compounded EPS growth signaling mismatch
- SBI’s intrinsic value at Rs 1,516 per share is over 2x the current market price of Rs 618 indicating sizable upside still present
Based on multiple historical comparisons, peer benchmarks and intrinsic value analysis, SBI stock appears to be significantly undervalued. The risk-reward is quite favorable for long term investors.
Considerations and Risks:
- Asset Quality: High levels of NPAs and the overall quality of the loan book remain concerns.
- Economic Sensitivity: As a major bank, SBI is sensitive to economic cycles and regulatory changes.
Industry Growth Prospects
The banking industry in India is undergoing significant transformations, influenced by several key factors:
Digital Revolution:
- The rapid adoption of digital banking, spurred by technological advancements and changing consumer behavior, is a major growth driver. SBI’s investment in digital initiatives positions it well in this transition.
Economic Growth:
- India’s economic growth directly impacts the banking sector, with increased demand for financial services as the economy expands. SBI, being the largest bank, is poised to capitalize on this growth.
Regulatory Environment:
- The Indian government and regulatory bodies are actively reforming the banking sector, with a focus on improving financial stability and operational efficiency. These reforms can create a more favorable environment for banks like SBI.
Competition from Fintech and Private Banks:
- The rise of fintech companies and agile private banks has intensified competition, pushing traditional banks like SBI to innovate and improve efficiency.