SBI shares: Undervalued banking stock hits record high, can it offer more returns?

Shares of State Bank of India (SBI) hit their record high in early trade amid a correction in the broader market today. The banking stock surged 6.41% to a high of Rs 718.80 in early trade. However, the SBI stock is still undervalued at this level. Its price to earnings (PE) ratio stands at 9.69 compared to the sectoral PE of 15.77. Its peer Punjab National Bank (PNB) has PE of 18.08. Other state-owned lenders such as Indian Bank and Indian Overseas Bank have PEs of 55.95 and 10.01, respectively.  

The state-owned lender also has a low PEG ratio of 0.3. A stock having PEG less than 1 is considered undervalued and with PEG ratio above 1 is regarded as an overvalued one.  The bank has a healthy Capital Adequacy Ratio (CAR) of 14.68%. Public sector banks are required to maintain a CAR of a minimum 12% in India.

SBI stock has delivered good returns of 21.37% in three months.

However, the lender reported a 35% fall in Q3 net profit of Rs 9,163 crore against Rs 14,205 crore reported in the year-ago period.

It earned Rs 105,733.78 crore in interest income in Q3 FY24, which was up 22% from Rs 86,616.04 crore reported in the year-ago period. The net interest income (NII) of the country's largest bank stood at Rs 39,815 crore, missing estimates of Rs 40,304 crore.

In the current session, the stock surged 6.41% to a high of Rs 718.80 on BSE.

The stock has gained 10.50% in 2024 and risen 29.08% in a year. However, Market cap of the bank climbed to Rs 6.32 lakh crore. Total 28.03 lakh shares changed hands amounting to a turnover of Rs 196.05 crore on BSE. 

In terms of technicals, the relative strength index (RSI) of SBI stands at 68.7, signaling it's trading neither in the overbought nor in the oversold zone. SBI stock has a one-year beta of 0.6, indicating low volatility during the period.  SBI shares are trading higher than the 5 day, 10 day, 20 day, 50 day, 100 day and 200 day moving averages.     

Brokerage Sharekhan has a price target of Rs 780 on the banking stock.

“The performance on loan growth and asset quality remains strong. Thus, we believe the bank is likely to sustain RoA of 1% in the near to medium term. We also acknowledge that the bank needs to ramp up other avenues of productivity (fee income and opex) to drive RoA/RoE expansion, which would also help in building up higher capital buffers through internal accruals. The bank has additional non-NPA provisions of 1% of loans outside the PCR to take care of any uncertain future events, which is a key positive. We maintain our Buy rating on SBI with a revised price target (PT) of Rs 780,” it said

abhudas Lilladher has a price target of Rs 770 with a buy call.

“Credit growth at 5.2% QoQ was best-in-class. While bank guided for 14-15% loan growth, we expect SBI to grow at 13% CAGR over FY24-26E due to tight system liquidity. We have cut loan growth by 1% for all coverage banks except SBI, given upside risks. We remain positive on SBI and keep our multiple unchanged at 1.4x on Sep’25E ABV and maintain SOTP based TP at Rs770. Retain ‘BUY’,” said the brokerage.

Brokerage Motilal Oswal has suggested a target of Rs 800 for the stock.

Nomura has raised its target on the stock to Rs 755 from 665 earlier.

"SBI was able to still report a 1 per cent RoA (excluding the exceptional item), even in Q3, which we find commendable. NIMs declined 7 bps QoQ to 3.2 per cent, despite a sharp improvement in loan-to-deposit ratio (from 71 per cent to 74 per cent), which was a tad disappointing. As a result, NII was 2 per cent below our estimate and so were core fees, resulting in a soft topline performance in 3Q. Positively, loan growth delivery was strong at 15 per cent YoY, and SBI has the lowest loan-to-deposit ratio among frontline banks," Nomura India said.