Shares of State Bank of India (SBI) and Bank of Baroda (BoB) will be in focus in Monday’s (November 6) trade as both the state-owned lenders posted their second quarter (Q2FY24) results recently. SBI shares were trading almost flat, while the Bank of Baroda stock fell over 3% to trade at ₹197.35 today.
SBI announced a healthy performance with net profit at ₹14,330 crore beating analysts’ estimate, aided by lower provisions even as bank made higher provisioning towards wage revisions. The lender’s net interest margin (NIM) declined 4 basis point quarter-on-quarter (QoQ) while loan growth was better-than-expected at 3% QoQ and 12% year-on-year (YoY) leading to net interest income (NII) growth of 1.5% QoQ, marginally above analysts’ estimate.
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On the other hand, BoB reported a 30% YoY earnings growth on the back of 33% YoY operating profit growth. The bank’s NIM declined 20 basis points QoQ and the near-term guidance for lower NIM is on expected lines, as per Kotak. The lender’s asset quality improved despite high slippages at ₹4,750 crore led by aviation account.
SBI has outperformed BoB on margin and asset quality in the September quarter. Macquarie Capital’s Suresh Ganapathy has a ‘Neutral’ rating on BoB and a ‘Buy’ view on SBI. He said that PSU bank margin compression was not as high as private sector banks.
Market expert Prakash Diwan said that SBI probably outperformed. “It is a giant of a balance sheet, it will take time to kind of give those incremental returns, which are much smaller Canara Bank or BOB could have done. But I would believe Bank of Baroda will probably have to reset itself, give them two quarters they will take that kind of time to come back.”With SBI’s quality concerns out of the way, the growth is looking very strong, he said, adding, “I think it is definitely under rated in terms of price as well. So I would believe there’s much more to go for SBI than BOB for sure.”
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Here’s what other brokerages opined on the two state-owned lenders’ stocks:
| Brokerages | SBI TP | BoB TP |
| Nuvama | ₹ 705 | ₹ 220 |
| Kotak | ₹ 725 | ₹ 215 |
| Emkay | ₹ 700 | ₹ 250 |
| Motilal | ₹ 700 | ₹ 240 |
SBI
Nuvama: The brokerage has retained a ‘Buy’ rating with a target price of ₹705, indicating an upside of 22% from the current levels. It said the bank’s CEO is confident of 14% loan growth and aspires to generate return on asset (RoA) of 1.2%. “With NIM near-bottom and RoA at 1%, risk-reward is attractive,” Nuvama said.
Kotak: The brokerage maintains a ‘Buy’ rating with an unchanged target of ₹725 on the counter. “We have maintained our estimates but believe that there is still scope for upgrades, especially on credit costs. Forecasting credit costs would be challenging but we are still in a period of low credit costs. The nature of the loan portfolio suggests that the intensity of this credit cost is unlikely to be as challenging as it was during the corporate cycle. The bank is growing its loan book a lot more cautiously, which gives greater comfort. The liability franchise remains impressive, which augurs well on credit costs.”
Kotak feels that valuations don’t reflect the strengths of this franchise. “We should see the bank trading at higher levels as the quality of earnings would continue to surprise positively and could it be longer than expected.”
Emkay Global: According to the brokerage, the bank expects some RBI action (possibly via increasing RWA) on low-value unsecured loans, but it claims that the bank’s Xpress PL portfolio has no loans disbursed for.
“We largely retain our earnings estimates and expect the bank to deliver 11.1% RoA and 16-19% RoE (return on equity) over FY24-26E,” Emkay said with a ‘Buy’ rating and a target of ₹700 per share.
Despite lower common equity tier 1 (CET1) at lower than 11%, the bank believes it can fund the current growth through internal accruals and is, thus, in no hurry to raise capital, the brokerage said.Motilal Oswal: The brokerage estimates SBI to deliver FY25 RoA and RoE of 1.1% and 18.3%, respectively. Motilal has a ‘Buy’ rating on the stock with an unchanged target of ₹700.
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BoB
Kotak: As per the brokerage, a slower re-rating hereon awaits the lender. It believes that BoB’s valuations, despite a strong performance, still remain attractive. Kotak has an ‘Add’ rating on the counter with a target of ₹215 from ₹200 earlier.
Kotak has upgraded its near-term earnings but continued with a conservative medium-term outlook for the bank in subsequent years. “We forecast further contraction of NIM as we believe that the competitive intensity on liabilities and assets is high, especially as there is no near-term risks on credit cost. Our investment thesis remains unchanged.”
While the brokerage said it likes BoB, Kotak added that the probability of superior return from current level looks unlikely. “It is likely to trade at a discount to SBI in this leg of the cycle,” it said.
Nuvama: The brokerage retains a target of ₹220 but downgraded the stock to ‘Hold’ from ‘Buy’. “BoB’s strong growth is leading to frequent NII misses. Negative surprises on its overseas book have also been higher than peers. We believe achieving the guided NIM of 3.15%, higher than the current 3.07%, is a tall task given the intense competition.”
Emkay Global: Going forward, the brokerage said that BoB expects growth to remain resilient, but has revised FY24 NIM guidance to 3.1% from the earlier 3.3%. Customer onboarding on BOB World remains suspended, and the bank expects this to resume in due course.
Additionally, Emkay said that value unlocking in the insurance subsidiary and strategic tie-up in BoB cards are likely to be near-term catalysts. It has a ‘Buy’ on BoB, with revised target of ₹250 per share from ₹260 earlier.
Motilal Oswal: The brokerage maintains its earnings estimates and expect FY25 RoA and RoE of 1.2% and 16.8%, respectively. “We value the stock at ₹240 and reiterate our buy rating,” it said.
Due to the restrictions imposed by the RBI on BoB World, the bank was not able to provide certain services to new customers but multiple channels were available to them to do their transactions and therefore the impact was minimised, the brokerage said.
Further, it said that the bank has taken significant actions in terms of compliance and expects the ban to be lifted in the near term.
