State Bank of India (SBI) reported 2.7 times year-on-year (YoY) earnings due to 100 percent YoY growth in operating profits (treasury loss in the base quarter). Return on assets (RoA) and return on equity (RoE) were unchanged at 1.2 percent and 20 percent, respectively.

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Loan growth was at 15 percent YoY and net interest margin (NIM) declined marginally to 3.3 percent. Though the first quarter tends to see higher slippages at 1 percent, the lender's performance has been better than the same quarter a year ago, suggesting limited concerns, analysts say.

SBI is a top public sector franchise, making it a top pick for analysts as well. Most analysts remain optimistic about the prospects of the state-owned lender and reiterated their 'Buy' rating on the counter. They largely have target prices in the range of Rs 630-748 for the PSU bank stock, but highlighted that NIM and loan growth remain key monitorables.

"SBI’s core fundamentals continue to be stable while delivery on the growth front along with sustained margins and controlled credit costs should drive movement in the stock," said domestic brokerage house JM Financial.

Shares of SBI have tumbled over 8 percent in the last five trading sessions. They settled at Rs 568.35 level in trade today.

The stock has been lackluster so far this year. The scrip has fallen 7.16 percent on a year-to-date basis, while it gained 9.21 percent in the last one year. SBI shares are trading nearly 10 percent lower from its 52-week high of Rs 629.65, hit on December last year.

Key levels to watch

The stock has witnessed a decent slide from the peak from 620 levels and recently has broken the significant 200 period MA (moving average) of 575 to slightly weaken the bias as of now. "The next major support lies near 550 levels of the previous low made and currently with profit booking witnessed we anticipate the stock to touch the 550 zone in the coming sessions," said Vaishali Parekh, Vice President - Technical Research at Prabhudas Lilladher .

"For the bias to improve, it needs to cross 578-580 zone decisively and anticipate for sustaining those levels for further upside movement," Parekh added.

Lower NIMs drag a steady quarter

The country's largest lender delivered a mixed quarter with NII missing estimates, led by margin contraction, while higher treasury income drove earnings beat.

NII declined 4 percent quarter-on-quarter (QoQ), up 25 percent year-on-year (YoY), missing analysts' estimate by 6 percent driven by a miss on loan growth and net interest margin (NIM).

"Though NIM contraction for SBI in Q1 was relatively higher (27 bps QoQ to 3.3 percent) versus private peers (12-20 bps), we believe most banks on cumulative basis would in near term will exhibit similar margin contraction," Emkay said.

Unadjusted NIM declined sharply by 27 basis point (bp) QoQ, sharpest fall amongst peers, while adjusted NIM declined 15 bp QoQ.

The profit after tax was up 178 percent YoY and 1 percent sequentially, beating consensus by 12 percent as lower NII was offset by lower opex and high trading gains.

Business growth remained modest in a seasonally weak quarter and the bank expects to gain healthy traction in the coming quarters. A higher mix of floating loans (MCLR), which could benefit further from re-pricing will continue to support the NII and overall earnings even as the deposit cost could increase, analysts say.

Asset quality was stable, despite both gross and net slippages increasing sharply on QoQ basis, mainly due to seasonality and unique slippages recognition policy.

The bank has hinted at lower domestic NIMs on-year for FY24, though sounded confident of 15 percent YoY credit growth and improving slippages in coming quarters.

According to Axis Securities, the bank is looking forward to expanding phygitally (physical plus digital). In terms of physical branches, the bank has planned to add 300 branches in FY24. Thus, opex ratios are expected to remain at elevated levels with the bank recording provision for wage revision.

Key risks, as per Emkay, include severe macro dislocation and a prolonged elevated rate environment hurting margins, leading to growth/asset quality disruption.

First Published:Aug 8, 2023 10:04 AM IST